Quant Investing

Yes, liquidity is a major concern. That is why in real-life investing we need to filter out stocks with low liquidity.

The reason mutual funds don’t do it is many. My guess is as follows:

• Lack of knowledge amongst the key fund managers: Most of the senior MF / PMS / AIF fund managers are 50+ and are completely clueless about quant strategies. They think it is some form of gobbledegook.
• Indian markets are illiquid and lack depth: A large fund say has 10,000crs in AUM. Assume it needs 20 positions in the portfolio. That means 500crs per position. If you wish to keep your holding less than 1% of the company, then the minimum market cap you can target is 50,000crs. That limits your investment universe drastically.
• A super-skilled discretionary investor can beat the market and any passive strategy: Once in a while, there will be a great investor with brilliant acumen who can beat the market and other passive strategies either by finding brilliant investments or by betting with high allocation in their big winners.
• Everyone thinks they are the “super-investor” mentioned above: All discretionary investors believe they are better than the average even when the data says they are not. No one wants to believe that all the effort they put in that makes them look important like reading annual reports, talking to management, attending AGMs, questioning on concalls, doing channel checks all add up to nothing tangible and a passive index is doing consistently better than them