What Is a Quant Fund?

Quant Funds Explained in Less Than 5 Minutes

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A quant fund is a fund that invests its assets based on quantitative analysis. Quant funds generally are run passively, based on predetermined screens and factors.

A quant fund is a fund that invests its assets based on quantitative analysis. Quant funds generally are run passively, based on predetermined screens and factors.

Some investors are attracted to quant funds because they take emotion out of the investing decision. Let’s go over how quant funds work, and what types are available for individual investors.

Definition and Examples of a Quant Fund

Quant funds are funds managed via quantitative or systematic analysis that’s based on computer models or algorithms instead of the qualitative opinion of a human manager. Some consider quant funds superior to qualitative funds because there is no emotion or bias involved in the investment management decision, while others champion an investing approach that combines quantitative and qualitative methods.

Quantitative funds are generally less expensive to manage than qualitative funds because much of the investment process is automated once the original algorithm or model is built.

The U.S. Quantitative Value ETF (QVAL) is a good example of a quant fund available to individual investors. QVAL uses a five-step process to screen down its investable universe (the largest 1,500 stocks in the U.S.) to a 50-stock portfolio. The model screens out stocks it believes could be in financial distress or that have manipulated accounting; narrows down the remaining stocks to the 100 cheapest based on valuation ratios; then uses profitability and other metrics to choose the 50 “highest quality” from that list to invest in.

Each step of its process is based on quantitative analysis and is done in a systematic way. The fund managers created the original model, but computers now do all the trading.

Qualitative or fundamental value managers may do similar work on potential investments, looking at valuation, quality, and earnings manipulation. But instead of using a wealth of data points or metrics, they might analyze what management says or use historical anecdotes to make the decision.

How Does a Quant Fund Work?

Many quant funds employ factor investing. Factor investing is investing done based on predetermined factors such as value, momentum, size, or dividend yield that are proven to beat the market averages over the long term.

Some quant funds choose one or two of the well-known aforementioned factors and invest based on them, while others, such as QVAL, use their own proprietary research to add additional screening to the factors or introduce new ones. Additionally, many qualitative funds use quantitative analysis. The manager can use factors to build a list of stocks to analyze then use qualitative analysis to settle on the best opportunity.

Quantitative investing is ideal for exchange-traded funds (ETFs) because it is passive management, but it is also a widely used strategy in hedge funds.

The Renaissance Technology Medallion fund is likely the most successful hedge fund in history. According to the book “The Man Who Solved The Market,” the fund returned an average of 66% per year using quantitative analysis.

Renaissance is a highly secretive firm and not much is known about its strategies beyond the fact that it is quantitative in nature, and the firm focuses on hiring non-finance personnel with doctorates to develop its algorithms based on market patterns.

Another example is Applied Quantitative Research (AQR), whose assets under management include mutual and hedge funds that utilize several different strategies and asset classes.

AQR isn’t as secretive as Renaissance. It has published a litany of research to back up the strategies it employs in its funds. Each strategy is developed by back-testing the combinations of different factors and metrics in the various asset classes. 

Qualitative vs. Quantitative Analysis

Quantitative analysis is a relative newcomer in the investment world. AQR is considered a trailblazer and it is only 23 years old. Qualitative investors such as Warren Buffett, Peter Lynch, and George Soros were beating the market for years before AQR was established.

Qualitative analysis (often called fundamental analysis) is focused on developing subjective opinions about the long-term viability of a stock. A good rule of thumb is that qualitative analysis is more of an art, while quantitative analysis is more of a science. While many qualitative analyses consider quantitative factors, quantitative analyses do not consider any subjective information.

Qualitative analysts make the argument that quantitative analysis is not enough. For example, if a stock is undervalued, it may be that way for a good reason, such as the hire of a new executive or an overhaul of company culture that may lead to better performance. Quantitative analysis may have recommended investing in a company such as Blockbuster because it seemed undervalued, while qualitative analysts could see Netflix (NFLX) changing the industry.

Quants believe that those types of risks can be decreased with diversification and by using a multifactor approach. For every Blockbuster that goes bankrupt because of its new online rival, there’s a Best Buy (BBY) that withstands the competitive forces and still produces strong returns.

What It Means for Individual Investors

Most individual investors won’t qualify to invest in hedge funds like Renaissance or other hedge funds of its ilk, but that doesn’t mean quant funds are out of reach. ETFs using multifactor strategies or drilling down on one factor (such as QVAL) are available for most investors.

Key Takeaways

  • Quant funds invest using computer models and algorithms instead of active human management.
  • Quant funds often invest using factors that have been proven to produce market-beating returns.
  • Individual investors can invest in quant funds through multifactor ETFs.
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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Alpha Architect. "Alpha Architect U.S. Quantitative Value ETF." Page 2." Accessed Dec. 22, 2021.

  2. Cornell Capital Group. "Medallion Fund: The Ultimate Counterexample?" Accessed Dec. 22, 2021.

  3. AQR. "Strategies." Accessed Jan. 3, 2021.

  4. American Century Investments. "Fundamental vs. Quantitative Investing Strategies." Accessed Dec. 22, 2021.

  5. Securities and Exchange Commission. "Investor Bulletin: Hedge Funds," Page 1. Accessed Jan. 3, 2022.

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