Quant fund vs. Value fund?

Question

Quantitative hedge funds are all the rage now, it is all over the news. What are the pros and cons of a quant fund versus a more conservative value fund? Take two of the top managers of from each disciplines, James Simon VS. Eddy Lampert. Who will prevail?

Answer 1

I'm betting on Lampert.

Have you read what the Wall Street Journal said recently about quants? Seems they've been having a hard time lately.

Justin Lahart. "How the 'Quant' Playbook Failed", WSJ August 24, 2007.

Ian Salisbury. "Why 'Quant' Strategy has Ripple Effects", WSJ August 31, 2007.

Gregory Zuckerman and Carrick Mollenkamp. "Savvy Hedge-Fund Bet Right on SubPrime, but...." WSJ September 6, 2007. ["Some high-profile hedge funds have registered big losses amid recent market turmoil. That includes Boston Sowood Capital Management, a hard-hit fund run by former Harvard Management executives, and many "quant" funds, which make trades based on complex computer models."]

Answer 2

Hi Mike S,

The pros of a quant fund can be a very pure investment style, lower expenses as well as a complete removal of emotion of from the investment process. The cons of a quant fund can be the inability of the portfolio manager to adjust to changing market conditions, poor performance during down markets and expenses. Expenses can be a pro or con. Quant funds should be cheap because you do not need a team of fundamental analysts to run the portfolio.

There are not many cons to a value fund. The biggest downside to a value fund would be not being able to take advantage of speculative markets. 1999 was a good example of this when value funds performed very poorly compared to growth funds Most value managers are conservative and don't chase hot sectors.

The pros of a value funds are strong performance over long periods of time, less risk than more speculative growth or quant funds over time as well as strong portfolio management teams. Value portfolio mangers and analysts normally have better credentials than growth and quant fund managers.

If you are interested in value investing, I highly recommend The Intelligent Investor by Benjamin Graham. Graham was a professor at Columbia University and one of his students was Warren Buffett.

I hope this helps.

Michael A. Weiss, CFA
The Editor
The Mutual Fund Investor
http://www.mutualfundinvestor.net

Answer 3

This is a distinction without a difference. If you look at some of the long term holding of Renaissance Technologies, they obviously invest in company's with strong cash flows and large dividends... hallmarks of value investing. Many quant funds use quantitative methods to come to the same conclusions value investors have been for years.

Perhaps when referring to quant funds you meant technical analysis. In that case... thats a whole other discussion.