The Quant Fund: Removing Emotion from Investing

The quant fund is a type of mutual fund that aims to remove emotion from investing. Controlling your emotions in investing can be very difficult at times and this type of fund makes it possible to do so. Here are the basics of the quant fund and how it could potentially help you as an investor.

The Quant Fund

The term quant fund is short for quantitative fund. With this type of fund, a team of fund managers develop a software program that analyzes potential investments. These programs use quantitative analysis in order to make their decisions. Some of these funds will rely solely on the advice of the model. Other funds will start off with the model and then allow a fund manager to make a final decision on investments. Regardless of which way a quant fund operates, the only thing that matters is the numbers. There is no investor sentiment with this type of investment strategy.

Rationale

The rationale behind this type of mutual fund is that we should take advantage of technology. Many people see computers do everything imaginable and they believe that there is no reason that they cannot beat the stock market as well. A computer will use only the numbers to make their decisions. They cannot be moved by any form of emotion which gives them a definite advantage over their human competitors. Another perceived advantage of this type of investment strategy is that computers can react much faster than humans. Therefore, if a change in numbers occurs, the computer can react immediately to the new circumstances.

Advantages

One of the main advantages of this type of investment strategy is that there is a definite system in place. This investment strategy is not backed by a fund manager that feels good about a certain security. If an investment is selected, you know that it has met the unique standards set forth by the computer model. Therefore, every investment has to meet certain criteria in order to be selected.

Even though it has already been discussed, it is very important to consider the impact that trading without emotion can have. Many investors will let emotion sway them and it can really affect a trade negatively. When this happens, investors tend to get scared and sell at the wrong times. They will also follow other investors and purchase securities just because everyone else is. It is this type of timing that dooms many investors and their portfolios.

Disadvantages

While the theory of being able to rely on computers to make your investment decisions for you is attractive, it also has some problems associated with it. For one thing, you have to identify a profitable trading strategy before you can program a computer to replicate it. This is often easier said than done. In addition to that, there are always errors associated with humans programming computers wrong. Therefore, there could be mistakes with large amounts of money at stake.

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