Hedge funds: This hedge fund manager tells you how to generate alpha in volatile times

Greed and fear often hinder investors’ ability to think rationally. When the markets are in turmoil, the potential for huge losses becomes a real possibility as the emotional aspect comes into play.

This is where Quantity Strategies score.

quant fund Rely on algorithmic or systematically programmed investment strategies. Investments in various strategies are based on a number of 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.

Furthermore, quant funds become equally active by achieving a passive style of continuous research and the incorporation of new models.

The Mumbai-based says these strategies are in early stages in India but are gaining investor attention Vaibhav Sanghviwho was among the first few fund managers to venture out hedge funds,

“What is extremely important in such strategies is how consistent and comprehensive they are while serving the objective. Under long-short strategies, from our point of view, risk-adjusted returns are the cornerstone around which we differentiate ourselves. Although it has been a year for the market, our volume-centric strategy has been relatively successful,” said Sanghvi.

Currently, low interest rates and ample liquidity, which has fueled the bullish momentum since March 2020, have started to reverse, leading to a correction in the market. Shanghvi expects the market to remain volatile for the next few quarters unless one sees inflation cooling off.

On the volume front, several medium-term indicators are indicating higher volatility in the asset class with broader market trends, he added.

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

When there is a significant gap or spread between the best and worst performing stocks, the returns from such strategies tend to be better.

This contrasts with periods when the stock markets tend to move together with high correlation and provide relatively little opportunities to capitalize on mispriced market prices.

With 17 years of expertise in hedge funds, Sanghvi has been a lifelong student of observation and analysis and has always had risk management at the core of his investment philosophy.

Your favorite author Naseem Nicholas Taleb (
black Swan), Sanghvi says, that Taleb’s propensity for negative events and the theory of the ability to exploit positive events attracted him, as it emphasizes different aspects of risk and vulnerability.

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

Being one of the first few fund managers to venture into hedge funds, and early in his career, Shanghvi says it took him too much exposure to long short market strategies to understand their peaks and troughs.

“Risk-adjusted return” is one of the most basic premises in finance, but few investors truly understand it, he said.

“I believe that everyone should evaluate their portfolio based on this concept, with a focus on generating alpha.”

Sanghvi started his career in 2000.

where he worked for five years as part of its equity 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 of $1 billion. He was later MD at Ambit Investment Advisors, before joining Avendus in 2016.

neutral market strategy
Sanghvi said the market-neutral strategy seeks to generate consistent and superior returns on a risk-adjusted basis independent of the market environment. The strategy benefits from offsetting long and short positions. For example, for every $100 long position the model company takes a $100 short position using a variety of models based on industry fundamental and technical data.

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

Shanghvi said that building a portfolio is the summation of different stocks based on different models which, in his case, he uses in his market neutral fund.

Since this strategy attempts to take advantage of relative performance in stock prices by going long and short with the same amount in different stocks, Sanghvi says that portfolio diversification and a broad-based portfolio protect them against risks such as volatility and downside. Helps to deliver on important aspects.

Sanghvi said rising interest rate regimes have historically suited market-neutral strategies. As higher interest rates usually result in higher volatility and more price dislocations within sectors and stocks, the opportunities will be substantial, leading to better monetization.

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