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Fund Spy

Are Quant Funds Back to Stay?

These funds are largely in recovery mode.

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Funds that use quantitative stock-picking models have spent the past three years trying to climb out of the deep hole they dug for themselves in the October 2007-March 2009 bear market and the early stages of stocks' ensuing rebound.

In the volatile period from late 2007 to the end of 2009--and beyond, in some cases--most quant funds struggled mightily. Their models often rely to a significant degree on earnings or price momentum measures, which caused the funds to build ever-increasing stakes in the hottest areas (such as energy and homebuilders), which then got slammed in the bear. Quant funds that make heavy use of valuation models, however, gravitated to financial stocks--many of which looked cheap on an absolute basis after their initial declines in late 2007 and early 2008--right before that sector plunged. To make matters worse, many quant funds then scooped up defensive fare such as consumer goods makers in the depths of the bear market, as they had the strongest relative earnings momentum at that time. Those stocks were then left behind when the market took off again in March 2009.

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