ideas for making money: this hedge fund manager tells you how to generate alpha in times of volatility

Greed and fear often hamper investors’ ability to think rationally. When the market goes haywire, the odds of incurring huge losses become a real possibility as the emotional aspect kicks in.

This is where quantitative strategies score.

Quantitative funds rely on algorithmic or systematically programmed investment strategies. Investments in various strategies are based on multiple trading signals based on economic data points, security price trends, real-time company news or any other measurable variable. With this, an institutional process is implemented without subjective bias.



Also, achieving a passive style of constant research and integrating new models makes quantitative funds just as active.

These strategies are still in their infancy in India, but they are attracting the attention of investors, says Mumbai-based Vaibhav Sanghavi, who was among the first fund managers to venture into hedge funds.

“What is extremely important in such strategies is how consistent and broad they are while achieving the objective. In long-short strategies, from our perspective, the risk-adjusted return is the cornerstone around which we differentiate ourselves. Although it has been a difficult year for the market, our quantity-driven strategies have been relatively successful,” said Sanghavi.

Currently, the low interest rates and ample liquidity that have fueled the uptrend since March 2020 have started to reverse, driving the market correction. Sanghavi expects the market to remain volatile over the next few quarters until inflation cools.

He said many medium-term indicators on the quantitative front are signaling higher volatility with broad market trends across all asset classes.

To get the most out of it, he advises investors to look at market-neutral strategies designed to work in all market conditions.

The returns of these strategies are higher when there is a significant spread, or dispersion, between the best and worst performing stocks.

This is a time when equities move simultaneously with high correlation between markets and offer relatively fewer opportunities to capitalize on market pricing errors.

Sanghavi, who has 17 years of expertise in hedge funds, has studied observation and analysis all his life and his investment philosophy has always had risk management at its core.

On his favorite author, Nassim Nicholas Taleb (
Black Swan), Sanghavi says that Taleb’s theory of building heaviness to negative events and the ability to exploit positive events fascinates him, as it emphasizes various aspects of risk and vulnerabilities.

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

Being among the first fund managers to venture into hedge funds and that early in his career, Sanghvi says he had considerable exposure to long and short market strategy to understand its peaks and troughs.

“Risk-adjusted returns” are one of the most fundamental tenets of finance, but one that few investors truly understand, he said.

“I think every individual should evaluate their portfolio based on this concept while focusing on generating alphas,”

Sanghavi started his career in 2000 with

where he worked for five years in 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 $1 billion proprietary equity investments. He was then MD at Ambit Investment Advisors, before joining Avendus in 2016.

Market Neutral Strategy
Sanghavi said a market-neutral strategy seeks to deliver consistent and enhanced returns, on a risk-adjusted basis, regardless of the market environment. The strategy benefits from netting both long and short positions. For example, for every Rs 100 long position, the model takes Rs 100 short positions, using different patterns based on company, industry fundamental and technical data.

The goal of the strategy is to mitigate one of the most important aspects of equity investing: market risk. At the same time, it aims to capture the inherent dispersion within the inter and intra sectors, he said.

Shanghvi said building a portfolio is a summation of various actions based on the different models, which in his case he uses in his Market Neutral Fund.

Since this strategy attempts to exploit relative stock price performance by going long and short with an equal amount in various stocks, Sanghavi says portfolio diversification and a broad portfolio help him manage important aspects of risk. such as volatility and declines.

Sanghavi said rising interest rate regimes have always been supportive of market-neutral strategies. As higher interest rates generally lead to higher volatility and more price dislocations within sectors and stocks, the opportunities would thus be plentiful, leading to better monetization, he said.

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts belong to them. These do not represent the views of Economic Times)