I kept thinking why was excess volatility so low for Quant MFs and I reached out to a client who runs a large advisory set up and asked him. "Do you know their turnover? I have an intuition it's very high". The client said, "It's acknowledged that their turnover is very high". I had my answer for how despite more than half of the segment data showcasing negative excess volatility, the fund was actually taking excessive risk to generate its incremental alpha. Let me introduce you to the magic of turnover and why you should not touch funds with turnover higher than annually 50%.
We await SEBI's findings, yet the notion of a top Indian MF engaging in frontrunning is hardly shocking. The industry still struggles to look beyond mere performance figures, presenting the regulator with the formidable task of uncovering the truth. Several months ago, an emerging fund manager in India approached me after successful meetings with family offices, praising the analytics we developed for him. He saw it as an opportunity to present his figures through a statistical, rather than a purely performance-based, lens. We agreed to apply our statistical methods, used in our own indexes and models, to evaluate Indian mutual funds, starting with the Small Cap category—his area of focus. Among the ten funds we analyzed, Quant Small Cap was included. Given our emphasis on dissecting performance to delve into risk and attribution, Quant did not emerge as a top-rated fund, despite its stellar performance.
