Quant investing uses disciplined, algorithm-driven processes and robust risk management to build portfolios with the potential for compelling, consistent performance.
Quantitative investing, once the domain of institutional investors, has become increasingly accessible through ETFs and mutual funds. This approach uses mathematical models, statistical techniques, and computer algorithms to analyse large datasets and identify investment opportunities. While it often incorporates advanced tools like machine learning and AI, human oversight remains essential.
Federated Hermes MDT Advisers (MDT), for instance, uses machine learning to parse through vast amounts of data and seek a multitude of equity opportunities in an unbiased way. The investment team designs, oversees, and continuously looks for ways to improve upon the various tools in its investment process. The entire process is transparent and the reasoning behind investment decisions are clear.
"Our quant process is not a ‘black box,' and trades are reviewed by members of the investment team prior to implementation," said Scott Conlon, investment director for Federated Hermes MDT Advisers, the active quantitative equity arm of Federated Hermes. He emphasised that their process is clearly defined, testable, and often more transparent than traditional fundamental approaches.
Unlike traditional stock pickers, whose success may hinge on intuition or one-off insights, quant investing aims to deliver repeatable results. One potential advantage of quant investing models is that they are testable using historical market data, allowing investors to understand how a particular strategy may have worked over a long period of time, and what the outcomes may have been to an investor in terms of return and risk, Conlon said.
Federated Hermes MDT Advisers' quant equity strategies are built on decades of daily data covering more than 25,000 U.S. companies across multiple market cycles. Their stock selection process is systematic and unemotional, supported by ongoing research and technological innovation. While algorithms handle the data analysis, human oversight ensures sound judgment in trade execution.
Diversification Through Style-Neutral Models
Quant investing also offers the potential for broader diversification. Traditional managers often focus on specific styles—such as value, growth, or small-cap—which can underperform in certain market environments. MDT's models, however, are style-neutral and span a wide range of market caps and investment styles.
"Our investing models don't lean toward a particular style or type of company," Conlon explained. MDT manages multiple U.S. equity strategies, including large-, mid-, and small-cap, as well as growth and value. This allows their portfolios to capture a wide array of opportunities with different risk and return characteristics.
This approach, which Conlon refers to as a differentiated "alpha engine," aims to identify a broader set of return drivers. By investing in diverse companies with varying performance catalysts, MDT seeks to deliver not only outperformance but also more consistent returns across different market conditions.
"We systematically invest across these alpha sources in a risk-managed way," said Conlon. "We believe it gives you a better chance to have something that's working in your portfolio in many market environments."
A Focus on Risk Management
Another core strength of quant investing is its rigorous approach to risk management. MDT uses sophisticated risk modelling to manage portfolio exposure. Rather than making sector or factor bets—such as favouring energy or small-cap stocks—they aim to avoid concentration risks and focus on stock selection as the primary driver of performance.
"Our process is dynamic, risk-managed and focused on stock selection," Conlon said. "Stock forecasts and portfolio positions are updated daily, enabling our strategies to adapt to timely market opportunities."
Ultimately, Federated Hermes MDT Advisers' quant approach combines the power of data science with human oversight to deliver a disciplined, transparent, and adaptive investment process. For investors seeking consistent, risk-aware performance across market cycles, quant investing offers a compelling option.
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