Quant funds in India, Lotus Agile fund & Ever-changing cycles
While there are tons of foreign hedge funds that use quantitative trading / investment strategies (indeed, some of them were in the public eye during the August credit crunch), there seem to be very few (if any) quantitative funds in India. At Moneyoga, we certainly are partial to the quant approach and have shared our plans to develop advanced analytics, system-based strategies and such.
What is interesting is that Lotus India AMC has just launched an NFO for its quant-based Agile Fund. They claim that it is India’s 1st - while there may be proprietary funds doing quant-stuff in India, Lotus certainly seems to be one of the earliest to bring it to the public.
- AGILE stands for Alpha Generated from Industry Leaders. It’s a Scheme which invests in equity shares using a mathematical model. The parameters which define the universe of stocks eligible for investment are designed to shortlist only companies that are amongst the leaders in their respective industries.
- The model used in the Lotus India AGILE Fund uses momentum strategies to construct its portfolio. A momentum strategy is based on the premise that over long periods of time, stocks which have been performing well on various parameters in the past will continue to perform well in the future. It has been observed that any momentum strategy works best in a portfolio of concentrated stocks. Indeed, the test data for the past few years corroborate this fact.
- While the investment pattern of the scheme permits the use of derivatives, the scheme will use the same only if they provide a tangible
advantage vis-à-vis cash stocks. Derivatives will not be used for hedging purposes.
Now, I’m quite excited about the fact that quant-based approaches are making their way to the Indian markets; the Moneyoga business model is geared to particpate in this growth. 
But given that the September-October period saw a very sharp mo-mo rally - something that occurs probably once in four years - I think a momentum-based long-only large-cap quant fund may be a bit off in terms of timing.
While I am a believer in data/system-based trading and backtesting, the law of ever-changing cycles makes me look at any quant strategy very carefully - the nature of the market can change quickly and make a strategy unprofitable. The key is to have a whole bunch of strategies in your arsenal, and pick the ones well suited to the current/expected market environment.
Unfortunately, the Agile Fund can’t do this - for example, if we were to enter a bear market, they can’t switch to a short-only strategy. While they do claim to beat the Nifty-50 index since 1997 (including bear markets), it does not matter to me as an investor - what I am interested in are absolute (positive) returns, not relative (less negative) returns!
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