Imagine this, Mr. Mehta, an investor, has been managing his portfolio for years, relying on traditional methods like gut feelings and periodic market reports. While things were stable, he always wondered if his portfolio could perform better.
One day, Mr. Mehta met his friend Rahul, an asset manager who used quantitative models to make investment decisions. Rahul explained how these models, driven by data and algorithms, helped him predict market trends and manage risks more efficiently. Intrigued, Mr. Mehta decided to try using quantitative models in his own investments. Almost immediately, he noticed improved portfolio performance, reduced volatility, and more precise risk management.
This story shows how quantitative models are changing the way investors approach asset management.
What Are Quantitative Models in Asset Management?
Quant models are tools that use data, mathematics, and algorithms to manage investments. The main motto of these models is to eliminate human biases and enhance decision-making by relying on data-backed strategies.
This evolution has been driven by the need for more efficient and effective ways to assess and manage assets, especially in complex and dynamic environments such as financial markets and industrial systems.
These quant models work on some crucial components:
They need financial data like stock prices, company earnings, and macroeconomic indicators. They also back-test using historical data to check how they would have performed in the past.
But how do quantitative models work in asset management?
Stock Selection:
Quant models automate the process of selecting stocks by relying on the data. It won’t be biased by emotions or any other opinion, it is purely based on the data.
It considers several parameters while selecting any stocks.
They consider the valuation ratios, earnings growth, momentum, and also volatility.
So, by applying algorithms, the model processes large data and then it identifies the stocks that meet specific criteria.
Asset allocation: Once stocks are selected, quant models help us to determine how much should be allocated to each asset. This helps in the perfect allocation to different asset classes based on various parameters.
The model automatically rebalances the portfolio as market conditions change, ensuring it stays aligned with the desired goals.
Rebalancing:
Quantitative models have built-in mechanisms to trigger rebalancing automatically when an asset class deviates from its target allocation. This is crucial because portfolio imbalances could expose investors to higher risk than initially intended.
Rebalancing doesn’t only consider the value of individual assets but also the overall risk level of the portfolio. If one asset (say, tech stocks) becomes too volatile or risky, the model may rebalance by selling some of that asset and buying more of a less risky one
Factor-based Investing: This is another parameter that will differentiate the quant models. It is based on the factors that have been shown to influence long-term returns.
They focus on value, growth, quality, and momentum.
Quantitative models use these factors to build portfolios aligned with specific investment goals, like growth or stability, enhancing returns based on these proven characteristics.
At Savart, we understand that successful asset management goes beyond intuition and gut feelings it requires a methodical, data-driven approach that eliminates human biases. This is exactly why we developed our APART system, a unique and powerful framework designed to guide investment decisions without the interference of emotions or cognitive biases.
The APART system leverages advanced quantitative models to help manage portfolios efficiently, focusing on optimization, diversification, and risk management. By relying on data and statistical analysis, our system ensures that every investment decision is grounded in hard facts, delivering consistency and improved outcomes for our clients.
Savart is a SEBI-registered investment advisor, founded by Sankarsh Chanda. The purpose of this content is to educate, not to advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.