Vaibhav Sanghavi on how Avendus Market Neutral Fund uses quant strategies to mitigate ‘market risk’

“Avendus Market Neutral Fund is primarily a Quants driven strategy, with an institutional process of investing and with a unique positioning between Debt and Equity,” says Vaibhav Sanghavi - Co-CEO, Avendus Capital Public Markets Alternate Strategies LLP.

In an interview with ETMarkets, Sanghavi said: “This approach mitigates one of the most important aspects of risk in investing – market risk.,” Edited excerpts:

Avendus Alternate Strategies has been doing a long-short strategy since its inception. How is the new AIF ‘Avendus Market Neutral Fund’ any different?
Our endeavour and approach have always been to offer innovative strategies across the risk and return spectrum.

Avendus Market Neutral Fund is primarily a Quants-driven strategy, with an institutional process of investing and with a unique positioning between Debt and Equity.

The recommended period of holding is 18+ months and aims to moderate the risk factors for the returns generated viz volatility and drawdowns.

Who should invest in this fund?
Avendus Market Neutral Fund is an AIF and hence it largely caters to HNIs, UHNIs, Family Offices, Trusts, Corporate Treasuries etc. who are looking to diversify their portfolio and earn risk-adjusted returns over a period of 18+ months.

In the new order of highly volatile global markets and performance of asset classes, investors will find Market Neutral Strategy, as a low correlation tool to achieve their overall objective.

How the market-neutral strategy works? Why the net exposure is zero?
As the name suggests, Avendus Market Neutral Fund, at the time of investing, the net exposure (Long minus Short) is aimed to be close to zero.

This approach mitigates one of the most important aspects of risk in investing – market risk.

Our strategy follows a data-driven approach to picking stocks, using pre-defined parameters across various factors including momentum, mean reversion, etc to diminish the role of human bias.

We have always focussed on risk-adjusted returns and with that in mind, this strategy has the ability to generate consistent returns while reducing risks.

How will this strategy beat the benchmark returns in a bull market?
The objective of the market-neutral strategy is to generate absolute returns over a medium-term by reducing the volatility vis-a-vis the benchmarks.

Focus on reducing the drawdowns gives a huge advantage while smoothening the profile of returns and managing behavioral aspects of investing.

How the quants strategy will score over fundamentals given this is AIF is based on quants model?
Quants as a philosophy uses data science to devise an institutional process of investing. Data science may include concepts right from fundamentals to technical.

Our fund has an inclusive approach that also takes into account the fundamentals.

Why a quant fund now? Is it to maximise wealth creation given discounted valuations?
Avendus Market Neutral Fund uses a combination of different models to achieve its objective. These models are expected to work under diverse market conditions which span across cheap to expensive markets.

The fund strategy endeavors to execute these models which are devoid of any human emotions or bias.

A lot of external factors will impact the performance of the fund. A lot of unknowns. How is risk managed?
Risk management has always been the foundation of all our strategies. We are of the strong belief that if one takes care of risk, return is just a by-product.

As a process, we have various risk limits incorporated at the model level as well as portfolio level which helps control volatility and drawdowns.

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