The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Monday, July 10, 2006

Quantitative Mutual Funds

The New York Times had an interesting article today on so-called quant funds -- mutual funds using proprietary quantitative models to make investment decisions: How a Computer Knows What Many Managers Don't.

Many mutual funds that make their trades based on the recommendations of a proprietary computer model, known as quantitative or quant funds, have outperformed their benchmarks in the last three years. And investors have noticed.

At the Vanguard Group, which created its first such fund in 1985, the amount of money managed by its quantitative group has quintupled in the last three years, to $20 billion at the end of 2005 from $4 billion in 2002.

While no organization keeps track of flows into quantitative funds, they are probably still a very small part of the $9.5 trillion mutual fund industry. Many quant managers, however, say the funds' recent performance has received a lot of attention.

Quant funds can come in different flavors. Those like the Vanguard Strategic Equity fund, which is closed to new investors and was up 5.9 percent this year through June, let the computer model make practically all the decisions, from which stocks to buy and sell to when to trade them. Other funds, like the Quant Foreign Value fund, up 11.1 percent, use quantitative analysis as a screen to narrow down a basket of stocks. The final investment decisions in this type of fund are then made by carbon-based life forms.

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