Ishika Mukherjee and Ashutosh Joshi

Quantitative strategists are believed to be good at finding winning formulas. But one puzzle they haven’t solved is how to succeed in India, one of the world’s top-performing major markets, in the era of the pandemic.

The Clash of Investments style, which exploits inefficiencies using mathematical models and algorithmic trading, stands in stark contrast to markets such as the US and China, where the quant scene is active and vibrant. Companies such as DE Shaw & Company and Two Sigma Investments have launched funds in China in recent years. Big names are rare in India.

Low interest, tighter regulations and active stock-picking success are stifling volume growth in the world’s most populous country. According to Siddharth Vora, portfolio manager at Prabhudas Lilladher, quant assets in India account for less than 1% of total assets, while in the US it is around 35%. Assets under management have declined by a fifth since the end of 2021, according to data provider ACE MF and investment advisor Fisdom.

“The quant segment is nascent on the product creation side, and the investor maturity in terms of understanding quant as a concept is also quite low,” said Nirav Karkera, head of research at Fisdom. Mutual funds with retail-friendly products dominate the sector, he said.

According to data compiled by Fisdom, there are only seven quant funds in India and they had a little over $300 million under management at the end of July.

Compare this to China, where regulatory easing for foreign funds led to a boom in quantitative investing in 2020, allowing them to profit from the wildest vagaries of the market. According to CITIC Securities, assets in private funds stand at 1.46 trillion yuan ($200 billion) and mutual fund products at about 228 billion yuan by the end of 2022, the Securities Times said.

It’s not that India lacks allure: stocks have hit record highs this year. The economy is expected to grow 7.6% in the second quarter, outpacing most other countries, and especially as an alternative to China, which is struggling to find its footing after the pandemic.

But, the success of conventional vehicles has discouraged investors from looking for attractive new options.

Smart beta products – which look a lot like India’s quant strategies – that track factors like price or momentum to outperform are “still relatively new and poorly understood”, says Kalpen, CEO, DSP Mutual Fund said Parekh, who manages DSP Quant Fund. , the country’s largest quant fund with just over $156 million in assets.

And information inefficiencies allow actively managed strategies to outperform benchmark indexes.

According to Vikas Prasad, fund manager at M&G Investments, who was part of the team at another firm that attempted to launch a quant fund in India a decade ago, quant investing “hasn’t taken off because traditional stock selection works in India”. “.

The atmosphere was neither favorable then nor now, he said.

Regulations have also stunted growth. The use of derivatives by mutual funds is prohibited. Short selling is difficult in the cash market. Transaction costs are high compared to markets like the US, Parshad said.

In addition, institutional investors, who often prefer more complex investment styles such as quants, have not shown much enthusiasm. According to Parekh, more than two-thirds of the assets in DSP’s Quant Fund come from retail clients.

Some green are shoots. A growing number of foreign hedge funds and market makers, including Marshall Weiss and Citadel Securities, are focusing more on India.

Quants account for about 10% of assets on average globally, said Rupal Agarwal, strategist at Sanford C. Bernstein. “So we would expect to see the same performance in India,” he added. “But it will take time.”

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