Outperformance, opportunity and optimisation: What makes India a ripe market for quant funds

This article is authored by Siddharth Vora, Head - Quant Investment Strategy and Fund Manager, PL Asset Management.

In today's rapidly evolving, tech-driven landscape, business and market cycles are shortening. In India, the NSE-registered unique investor base has exceeded 9 crore, with monthly SIP flows surpassing Rs 19,000 crore and mutual fund assets standing at Rs 53 lakh crore. The market is becoming increasingly efficient by the day. Moreover, market action is being significantly influenced by algorithms and passive fund flows.

This demands a dynamic, agile, and adaptive approach to managing money to effectively navigate the evolving financial market landscape. The solution: Quant funds

The popularity of quant funds is increasing globally. In the US, quant funds represent 35 per cent of the market share in 2023, compared to 26 per cent for active funds and 39 per cent for passive funds. This is a significant shift from the 89 per cent active and 11 per cent passive split in 1989.

Innovation in the US often influences other markets, including ours. India presents a promising environment for quant funds, characterised by the availability of clean and extensive historical price and fundamental data, an expanding pool of technology and data science talent, and a growing acceptance of systematic, rule-based investing over the past decade.

Despite a 232x growth in Assets Under Management (AUM) of quant funds in India over the past decade, they still represent only 1 per cent of the total AUM, indicating significant potential for growth.

With the way India’s asset management industry is shaping up, here are some key reasons why quant funds stand to gain incremental market share in the coming years.

1. Higher per cent of quant funds beat benchmark versus active funds: Investors crave market-beating returns and quant funds have consistently outperformed the BSE 500 TRI across all timeframes. Over one year, 64 per cent of quant funds beat the index, with this figure rising to 75 per cent over three years and 91 per cent over five years. In stark contrast, active funds lag, with only 45 per cent beating the index in one year, 37 per cent in three years, and a mere 39 per cent over five years.

2. Culmination of data, tech and talent: In India, data spanning over 20 years is now readily accessible, enabling quant funds to backtest their strategies across various market cycles. Using standardised APIs, these funds efficiently retrieve data from sources like stock exchanges and financial news websites.

Additionally, India's rapid technological growth, with over 800 million internet users, development of 5G/6G services and widespread cloud computing adoption, provides quant funds with the infrastructure needed to deploy complex algorithms effectively. Emerging alternative data sets, including product reviews, weather data, web traffic, and app usage, offer further potential for enhancing these models.

With over 1.5 million engineering graduates joining the workforce annually and a thriving IT industry of over 4.5 million professionals, India provides a solid foundation for developing complex quant strategies. This is a key factor in ensuring that quant models stand out and there is no crowded trade.

3. Lower costs, higher scalability

For a price-sensitive country like India, another good news is that quant models are highly cost-efficient. Automation in data processing, analysis, and trade execution reduces operational costs, while efficient trading practices like algorithmic trading lowers transaction costs.

4. Bias-free investing

Global investors view India positively due to its rich demographic dividend, with 600 million people aged between 18 and 35, about 65 per cent of whom are under 35. As per capita income grows from the current USD 2,450, new HNIs and young investors are likely to seek unbiased avenues and new investment ideas with independent thinking.

Quant funds offer an alternative to active funds, which may sacrifice investor returns due to biases in fund managers' decision-making processes, such as the disposition effect or the anchoring bias. This presents an opportunity for quant funds to attract young investors seeking unbiased investment options.
 

5. Increasing awareness of systematic strategies

Expanding on the previous point, favourable demographics also mean that Indian investors are becoming more sophisticated in their thought processes. They are seeking systematic approaches to investing that can quickly adapt to market shifts and effectively manage risk. Quant funds fill this gap perfectly.

For instance, during volatility, quant strategies can adjust portfolio sensitivity by shifting into cash, increasing exposure to defensive sectors, or hedging with derivatives. They ensure adaptability across asset classes, sizes, sectors, styles, and beta, constructing a benchmark-agnostic portfolio that offers granular returns. This mitigates downside risk and safeguards capital.

Conclusion

The bottom line is that quant funds are the perfect combination of man, data, machine, and alpha. India is among the fastest-growing economies globally, on track to become the 3rd largest economy by 2028. With over 5,000 listed companies on the BSE compared to 2,300 on the NYSE, quant funds emerge as the forward-looking choice for investors seeking resilience, adaptability, and the true flavour of India in their portfolios.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.