Quant Mutual Fund Comes Under SEBI Radar Over Alleged Front-running. Know What it Means for Investors

Why is SEBI probing Quant Mutual Fund?

Although SEBI has not issued an official statement, media reports have confirmed that the market regulator noticed discrepancies during their regular inspections of Quant Mutual Fund. It is alleged that the market regulator found a potential pattern where trades by certain entities closely mirrored those of Quant Mutual Fund, indicating potential front-running. This similarity in trade pattern suggests that someone might have been leaking information about bulk trade orders of Quant Mutual Fund, allowing them to capitalize from the potential gains ahead of AMC's transaction.

Reports further suggest SEBI suspicion that someone within the fund house or the brokerage firm they use, having access to non-public trade details like order size and timing, might be leaking confidential information about upcoming trades. As a part of the investigation, SEBI has conducted search and seizure operations in Quant's head office in Mumbai and at the address of the suspected beneficiaries in Hyderabad, said sources. SEBI has also questioned dealers of Quant Mutual Fund and persons connected with the case.

At this point, there is no clarification on whether the allegations involve the fund management team or only the external parties.

What is front-running?

Front-running is a form of insider trading and is considered one of the most serious offences by the SEBI. It is an illegal act or a practice where market participants, such as dealers or brokers, exploit their position for personal gains. These intermediaries execute personal trades after receiving information in advance about a large trade volume to be bought or sold. Such deals are carried ahead of the bulk buy/sell transaction to benefit from the price movement due to the bulk buy/sell transaction, even before the clients could benefit from it.

[Read: Front-running Cases in Mutual Funds: All You Need to Know]

For instance, let us assume that a dealer has received a large order from a mutual fund for buying 1 lakh shares of XYZ company. It is important to note that the share price of a company generally goes up when it is purchased in huge quantities. Therefore, before executing the large order, the dealer buys shares of the same company through his/her personal account to benefit from the expected rise in the share price. This results in an unfair advantage to the intermediary and reduces the potential returns for the mutual fund and its investors.

SEBI had banned Axis Mutual Fund's Mr Viresh Joshi who served as the Chief Dealer & Fund Manager at Axis Mutual Fund along with 20 other entities from engaging in any buying, selling, or dealing with the securities market, either directly or indirectly, until further instructions. Viresh Joshi was also suspended from his responsibilities by the AMC.

About Quant Mutual Fund

Quant Mutual Fund is one of the fastest-growing fund houses, with its assets having grown from just about Rs 200 crore in early 2019 to about Rs 84,000 crore as of May 2019. This stupendous rise in assets can be attributed to its high-ranking performance across various sub-categories of equity mutual fund. The fund house adopts a quantitative approach to select stocks based on its proprietary VLRT framework, which assesses the stocks on their Valuations, Liquidity, Risk, and Timing. Quant Small Cap Fund is the largest scheme at the AMC, managing assets worth more than Rs 21,000 crore currently, followed by Quant Active Fund, Quant ELSS Tax Saver Fund, Quant Mid Cap Fund, and Quant Flexi Cap Fund.

What does Quant Mutual Fund has to say about the SEBI probe?

In the wake of media reports on alleged front-running, Quant Mutual Fund issued a statement clarifying that it has indeed received inquiries from SEBI, though it has not specified whether the investigations were related to front-running.

It stated that the AMC is committed to cooperating with the regulator throughout any review and that it will provide all necessary support and continue to furnish data to SEBI on a regular and as-needed basis.

What are the steps taken by SEBI to prevent front-running?

Following the Axis Mutual Fund front-running case, SEBI made major changes last year to enhance the existing framework by requiring AMCs to put in place a 'structured institutional mechanism' for...

1) Identification and deterrence of potential market abuse, including front-running, and

2) Fraudulent transactions in securities

Structured institutional mechanisms, according to the regulator, should consist of enhanced surveillance systems, internal control procedures, and escalation processes to identify, monitor and address specific types of misconduct, including front running, insider trading, misuse of sensitive information, etc.

In other words, SEBI has put the onus on fund houses to strengthen their compliance and governance norms in the interest of investors.

[Read: Front-Running in Mutual Funds: Here's How SEBI Plans to Keep Check]

What should investors in Quant Mutual Fund do?

While the fund house's strategy of picking momentum-driven bets has worked in its favour, if the probe discovers the involvement of fund managers and/or other executives of the AMC it will raise a question mark on the integrity of the fund house, potentially tarnishing its reputation as well as performance of the scheme. This may result in redemptions and also impact inflows into the schemes.

However, investors should avoid any knee-jerk reaction and await further clarification, evidence and reports of investigation by the SEBI before taking any portfolio decisions.

Many equity mutual fund schemes of Quant Mutual Fund across categories have been top performers, with several of them on the 'Buy' and 'Hold' list of PersonalFN. We will update our subscribers in case of any change in our view of the scheme/s amid the SEBI probe.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.