Maths-based investing looks to gain ground in India-(

Mathematical symbols greet you at the entrance of Quant Broking Pvt. Ltd in Mumbai’s business district of Nariman Point, emphasizing the nature of research the company carries out. Its business cards say “measurable is reliable” to drive the point home.

Quant is one of a small but increasing number of firms that say they use mathematical, or quantitative, tools to help clients make investment decisions.

Although such research is commonplace in developed markets, it is fairly new in India, where money managers have traditionally relied on largely subjective techniques such as fundamental analysis or technical analysis.

Fundamental analysis takes into account the performance of a firm, the industry it operates in, political and geographical risk, and so on, while firms that depend on technical analysis study charts and detect patterns to make trading decisions.

“Objectivity is our religion and data is our god,” said Sandeep Tandon, who heads Quant. He started the firm in May 2008 and sold it to Reliance Capital Ltd just over a year ago.

Even as the fundamental and technical analysis space has become overcrowded, leaving little scope for innovation, the spurt in data in Indian equity markets, along with the development of a vibrant exchange-traded derivatives market, over the past decade has helped the growth of quantitative analysts.

At least eight companies in India Mint spoke to use quantitative tools for making investment decisions.

Quantitative analysts try to quantify all possible market cues in order to arrive at an “objective” investment decision.

Tandon, for instance, combines behavioural inputs that can be measured, such as investor reactions to news flow, analyst calls, and other historical data, which then helps set up a ranking system for stocks to be bought, sold or held.

He has a 172-member research team that keeps track of 150 variables, including price, volumes and open interest across multiple assets such as equities, commodities, currencies and credit markets.

Some money managers, including Motilal Oswal Financial Services Ltd and ING Investment Management (India) Pvt. Ltd, have launched dedicated quantitative analysis-based schemes for retail and high networth individuals over the past year.

Radhakrishna Pendyala, an associate vice-president at Benchmark Asset Management Co. Ltd, analyses trends in the price movements of different asset classes using statistical methods such as time series to build forecasts for multi-asset allocation schemes.

While Tandon believes in sophisticated indices and complex mathematical techniques, there are also some quantitative analysts who claim to use simpler but equally objective techniques.

Samir Gilani, head of equities at MAPE Securities Pvt Ltd, said his firm has hedge funds and proprietary desks of investment banks as its clients and relies on a back-tested algorithm to generate investment calls.

The algorithm uses “simple arithmetic tools and no fancy math”, said Gilani, who has just two more people working with him in the research team.

Yogesh Radke, senior manager and head of quantitative research at Edelweiss Capital Ltd, prefers to develop simple pair strategies—in which an investor takes opposing positions in two stocks in the same sector—rather than complicated models for his institutional clients, which are mostly hedge funds.

“While a fundamental analyst will tell you what to buy, a quant will design a portfolio and tell you how much of each stock to buy,” said Radhika Gupta, who started Forefront Capital Management along with another ex-AQR Capital Management colleague and a former employee of Goldman Sachs Group Inc.

The company, which manages assets worth Rs.50 crore, says it has outperformed the Nifty by 10% since September 2009. Gilani of MAPE Securities said his algorithm has given returns of 300% from May 2007 to November 2010, compared with 47% for the Nifty. Mint couldn’t independently verify these claims.

Fund managers, however, say it will take some time before quantitative analysis becomes the preferred option for investors.

Clients in India typically limit themselves to receiving advice on a list of stocks to buy and sell, remaining unaware of the process by which such lists are compiled. This could be one reason why quantitative research find few takers.

The technique is also hampered by the limits of the Indian market. For instance, high-frequency trading—a major factor for the proliferation of quantitative strategies in the West—is yet to take off in India.

The lack of liquidity in most stocks and a derivative segment that was non-existent a decade ago mean there is simply not enough data on prices and other characteristics of stocks, such as volumes and open interest, for quantitative analysts to build sophisticated models.

Although there are 6,000-odd stocks listed in India, hardly 100 have enough liquidity to generate the kind of data necessary for quantitative analysis.

“I would rather train a market guy in math rather than hire a math guy and train him to understand the market,” said Prashanth Narayan, chief investment officer, portfolio management services, ING Investment Management, which manages assets worth Rs.1,353 crore using quant-based models.

This is unlike the West, where most researchers hail from a mathematics or financial engineering background and are tasked with writing computer programs that can take advantage of even minute differences in yields among asset classes.

The use of quantitative methods in selecting a portfolio of stocks is also quite common in the US, and accounts for one-fifth of the total assets managed by fund managers, according to analysts.

(Source: Mint, New Delhi)
trackingBy Pramit Bhattacharya, Mint, New Delhi