Also known as quantitative funds, quant funds are investment or mutual funds that utilize the process of quantitative analysis to make decisions regarding the selection of securities as investments. The idea is to make use of models created with the use of software to evaluate the potential of a given security, and make a decision of whether to buy or sell that asset. In a pure quant shop situation, the computerized models provide the recommendations to buy or sell, without any real input from a human fund manager. More often, quant funds use both the computer-generated models and the expertise of a fund manager to make the final decisions about what is and is not purchased for the investment fund.
Proponents of quant funds often note that the use of the computer models helps to remove the element of sentiment or other emotions from the process of assessing various securities. In theory, this means that those using the models will look only at actual facts and avoid speculation that is based more on hopes and instincts and less on consideration of past performance, current market conditions and projected future movements. As an added bonus, use of the models make it possible to complete the analysis in much less time than an individual could manage the task.
Detractors of quant funds often respond with the observation that the analysis provided by the model is only as good as the data entered on the front end. Should the information that is provided for the analysis be outdated or incorrect, the results will also be flawed. Without human intervention to double check the veracity of the data and the logic of the recommendations that result from the analysis, the possibility of making costly mistakes with the fund management is increased.
There are quant funds that utilize a hybrid process as a means of having the benefits of the models as well as the expertise of a competent fund manager. With this approach, securities for the fund are evaluated using the computer model, providing recommendations that the fund manager can then consider. Should the fund manager find that his or her assessment of a given security agrees with the recommendations, then the trading activity will take place. Should the fund manager not agree with the recommendations, further research is conducted before any trading orders are executed. This approach makes it possible to establish checks and balances that enhance the chances of making investment decisions that ultimately are in the best interest of the fund and its shareholders.