Quants Fail to Replicate Their US and China Success in India

Quantitative strategists are supposed to be good at figuring out winning formulas. But one puzzle they haven’t solved is how to succeed in India, one of the world’s top-performing major markets of the pandemic era.

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Quantitative strategists are supposed to be good at figuring out winning formulas. But one puzzle they haven’t solved is how to succeed in India, one of the world’s top-performing major markets of the pandemic era.

The struggles of the investing style, which exploits inefficiencies using mathematical models and algorithmic trading, contrast with markets like the US and China, where the quant scene is active and vibrant. The likes of DE Shaw & Co. and Two Sigma Investments have launched funds in China in recent years. In India, big names are rare.

Low interest, strict regulations and the success of active stock-picking are scuppering the growth of quants in the world’s most populous nation. Quant assets account for less than 1% of the total in India, compared with around 35% in the US, according to Siddharth Vora, a portfolio manager at Prabhudas Lilladher. Assets managed have declined by a fifth since the end of 2021, according to data provider ACE MF and investment adviser Fisdom.

“The quant segment on the product manufacturing side is nascent, and investor maturity in terms of understanding quant as a concept is also reasonably low,” said Nirav Karkera, head of research at Fisdom. Mutual funds with retail-friendly products dominate the space, he added.

There are only seven quant funds in India and they managed just above $300 million as of the end of July, according to data compiled by Fisdom.

Contrast that with China, where quant investing took off in 2020 partly due to regulatory easing for foreign funds, allowing them to profit from the market’s wild dislocations. There, assets stand at 1.46 trillion yuan ($200 billion) in private funds as of the end of 2022, according to CITIC Securities, and around 228 billion yuan in mutual fund products, Securities Times said.

It isn’t that India lacks appeal: stocks have hit record highs this year. The economy is expected to have grown 7.6% in the second quarter, outstripping most other countries, and particularly as an alternative to China, which is struggling to find its footing post-pandemic.

But, the success of traditional vehicles has discouraged investors from seeking flashy new options. 

Smart beta products — which India’s quant strategies tend to look like — that track factors like value or momentum to seek outperformance are “still relatively new and poorly understood,” said Kalpen Parekh, chief executive officer of DSP Mutual Fund, which manages DSP Quant Fund, the nation’s largest quant fund at just $156 million in assets.

And information inefficiencies allow actively-managed strategies to beat benchmark indexes.

Quant investing “hasn’t grown because traditional stock picking does work in India,” according to Vikas Pershad, a fund manager at M&G Investments who was part of another firm’s team that attempted to launch a quant fund in India a decade ago. 

The environment wasn’t conducive then or now, he said.

Regulations, too, have held back growth. The use of derivatives by mutual funds is restricted. Short selling in the cash market is tough. Transaction costs are high relative to markets like the US, Pershad said.

What’s more, institutional investors, to whom relatively complex investing styles like quant often appeal, haven’t shown much enthusiasm. More than two-thirds of the assets in DSP’s quant fund come from retail clients, according to Parekh.

There are some green shoots. A growing number of foreign hedge funds and market makers including Marshall Wace and Citadel Securities are focusing more on India. And asset managers such as Prabhudas Lilladher are using quant methodologies for their portfolio management services that they offer to wealthier clients.

Quants account for about 10% of assets on average globally, said Sanford C. Bernstein strategist Rupal Agarwal. “So that is what we would expect to play out in India as well,” she said. “But it would take time.”

–With assistance from Akshay Chinchalkar and April Ma.

(updates with fresh detail in penultimate paragraph.)

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