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money-making ideas: This hedge fund manager tells you how to generate alpha in volatilite times

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Greed and fear often hinder investors’ ability to think rationally. When the market goes haywire, chances of making huge losses become a real possibility as the emotional aspect comes to play.

This is where quant strategies score.

Quant funds rely on algorithmic or systematically programmed investment strategies. Investments in various strategies are based on multiple trading signals based on economic data points, trending security prices, real-time company news or any other measurable variable. With this, an institutional process is implemented without subjective bias.



Besides, attaining a passive style of constant research and incorporating newer models make quant funds equally active.

These strategies are at a nascent stage in India but they are getting investors’ attention, says Mumbai-based Vaibhav Sanghavi, who was among the first few fund managers to venture into hedge funds.

“What is extremely important in such strategies is how consistent and broad-based they are while delivering to the objective. Under long-short strategies, from our perspective, risk adjusted return is the cornerstone around which we differentiate ourselves. Though one year has been difficult for the market, our quant focused strategies, led by diversification and institutional processes, have been relatively successful,” Sanghavi said.

At present, low interest rates and ample liquidity that fuelled the bull run since March 2020 have started reversing, leading to the market correction. Sanghavi does expect the market to stay volatile for next few quarters, till one sees inflation cooling off.

He said many medium term indicators on the quant front are signalling higher volatility with large market trends across asset classes.

To make most of it, he is advising investors to look at market-neutral strategies that are designed to perform across market conditions.

Returns from such strategies are superior when there is a significant gap, or dispersion, between the best- and worst-performing stocks.

This is against a period when stocks move together simultaneously with high correlation across markets and offer relatively lesser opportunities to capitalise on market mispricings.

Sanghavi, who has 17 years of expertise in hedge funds, has been a student of observation and analysis all his life and that his investment philosophy has always had risk management at its core.

Quoting his favourite author, Nassim Nicholas Taleb (
Black Swan), Sanghavi says Taleb’s theory of building heftiness to negative events and an ability to exploit positive events fascinates him, as it emphases on various aspects of risk and vulnerabilities.

“I really enjoy his philosophical as well as empirical reflections on life changing events,” he said.

Being amongst the first few fund managers to venture into hedge funds and that early in his career, Sanghvi says he had a considerable exposure in long short market strategy to understand its peaks and troughs.

‘Risk adjusted returns’ is one of the most basic premises in finance but one that few investors truly understand, he said.

“I believe every individual should evaluate their portfolio based on this concept along with focussing on generating alphas,”

Sanghavi started his career in 2000 with

where he worked for five years as a part of its equities and private banking team. He also worked with DSP Merrill Lynch’s strategic risk group for three years and was responsible for managing their proprietary investments in equities amounting to $1 billion. He was later MD at Ambit Investment Advisors, before joining Avendus in 2016.

Neutral market strategy
Sanghavi said a market-neutral strategy seeks to generate consistent and enhanced returns, on a risk adjusted basis, independent of the market environment. The strategy benefits from offsetting long and short positions. For example, for every Rs 100 long positions model takes 100 rupees short positions, using different models that are based on company, industry fundamental and technical data.

The focus of the strategy is to mitigate one of the most important aspects of investing in equities – market risk. At the same time, it aims to capture the inherent dispersion within inter and intra sectors, he said.

Shanghvi said construction of a portfolio is a summation of various stocks based on the different models, that in his case, he uses in his Market Neutral Fund.

Since this strategy attempts to exploit relative performances in stock prices by being long and short with an equal amount in various stocks, Sanghavi says diversification of portfolio and a broad based portfolio helps him deliver on important aspects of risks such as volatility and drawdowns.

Sanghavi said rising interest rate regimes have historically been favourable for market-neutral strategies. As higher interest rates typically lead to higher volatility and more price dislocations within sectors and stocks, opportunities because of this would be ample, leading to better monetisation, he said.

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)

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