Risk Management in Quant Mutual Funds

Jun 28, 2024

Risk Management in Quant Mutual Funds

Introduction

  • Risk management focus
    • How to manage unknown and perceived risks
    • Quant fund revolves around risk management, returns are a byproduct

Reality vs Narrative

  • Market driven by narratives in the short-term
  • Long-term investments tend to reveal true realities
  • Regulatory constraints prevent extensive commentary
  • Binary approach: like or hate, no partiality

Quant’s Approach to Investment

  • Binary Thesis
    • Clear stance: like or dislike stock
    • Quantifies everything from market impact
  • Historical Performance
    • Leading in risk-adjusted returns
    • Fastest growing asset management company with 93,000 crores assets

Regulatory Aspects and Perceived Risk

  • Vigilant regulators ensuring transparency
    • Regular audits and inspections
  • Perceived risk related to ongoing narratives
  • High liquidity maintained in portfolios
    • 54% liquidity in total assets
    • Dynamic rebalancing of portfolios

Addressing Market Noise

  • Emphasis on direct communication over media narratives
  • Low net outflows despite noise (1,398 crores)
  • Robust liquidity position
    • Reports from 24th show consistent liquidity

Management of Unknown Risk

  • Systematic risk management
  • Example: Adani and PSU exposure

Perceived Risk and Perception Analytics

  • Importance of perception in driving market narratives
  • Perception Analytics developed to quantify market perception

Current Market Outlook

  • Decisive bull run phase
    • Shift from mid/small caps to large caps
  • Strong liquidity position
    • 54% liquid assets
    • Effective dynamic rebalancing strategies
  • Perception of India as a major investment opportunity
    • Economic policies, demographic trends

Future Projections

  • Confidence in India's economic growth till 2047
  • Risk management practices will continue to evolve
  • Sector-specific perspectives
    • Bullish on PSU, commodities, infra growth

Conclusion

  • Commitment to risk management
  • Encouragement to investors not to panic with market noise
  • Continued transparency and communication with stakeholders