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Fund Spy

Three Quant Funds Built to Last

Better days lie ahead for these battered funds.

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Quant funds are unquestionably down, but it would be a mistake to count them all out.

In Part 1 of our look at funds that let computers do the investing, we explored the reasons why they had generally struggled in both the October 2007-March 2009 bear market and the ensuing rally. We also detailed why they might mount a comeback--or why they might not. Some investing professionals believe quant investing has become too popular, causing both value and momentum signals (staples of many quant strategies) to lose their effectiveness. Others argue that these signals have simply been out of favor: Both value and momentum didn't work well in the recent bear market, and momentum has continued to struggle as stock prices--contrary to their history--haven't closely followed earnings. Buying modestly priced firms with rising earnings certainly ought to work over the long term, though. Those who are optimistic about quant funds also point out that the bear market has reduced competition among quants by shaking out many quant-driven hedge funds.

Quant funds will survive, and some will even thrive. Here's how to pick winning quant funds, as well as a few of our favorites.

Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.