Should Quant MF Investors Be Concerned About Front-Running?

Quant Mutual Fund is currently under scrutiny by the Securities and Exchange Board of India (SEBI) for suspected front-running practices. With a substantial ₹93,000 crore of investor assets under management (AUM), the pressing question for investors is whether their investments are at risk. 

Quant Mutual Fund has experienced a remarkable surge over the past year, with its AUM skyrocketing by 251%, from ₹23,956 crore in May 2023 to a substantial ₹84,030 crore in May 2024.  

Front-running is an illegal practice where an individual with advanced knowledge of a large upcoming trade, such as a mutual fund purchase, uses that information to buy the stock beforehand, thereby gaining an unfair advantage. This advantage is significant because the stock price typically rises when the fund executes its actual trade. 

Amit Goel, Co-Founder and Chief Global Strategist at Pace 360, underscores the severity of the situation, stating, "Front-running essentially involves buying stocks before the fund itself does, driving the price up. This means the fund buys at a higher price, potentially impacting returns for investors. The erosion of investor trust in the fund house, which can lead to redemptions and affect the fund's net asset value (NAV), is a significant concern. The outcome of the investigation is crucial, as it can create uncertainty, causing investors to hold off on further investments or even redeem existing ones until the situation is resolved." 

According to the stress test results released by the Asset Management Company (AMC) on June 15 for the month of May, the small-cap portfolio would require 28 days to liquidate 50% of its holdings. Additionally, the Quant MF portfolio would need 14 days to liquidate 25% of its assets, and the small-cap fund would also require 14 days to complete the liquidation process. These results underscore the urgent need for caution and preparedness in the face of potential market volatility.

However, Quant MF investors should remain calm. SEBI is conducting a thorough investigation, and if no wrongdoing is found, the impact might be minimal. Furthermore, investor money is typically held securely, even if penalties are imposed on the fund house. "In most cases, investor money in mutual funds is held securely. Even if the fund house is penalized, investor money is typically not directly at risk. SEBI’s primary focus is protecting investor interests," added Goel.

In a communication to investors on June 23, Quant MF said it had received inquiries from SEBI. "Recently, Quant Mutual Fund has received inquiries from SEBI, and we want to address any concerns you may have regarding this matter. We want to assure you that Quant Mutual Fund is a regulated entity, and we are always fully committed to cooperating with the regulator throughout any review," it said. While uncovering front-running, much like insider trading, is notoriously challenging, a meticulously detailed order at the preliminary stage indicates commendable thoroughness in the investigation.

If you have invested in such a fund for the long term with a well-diversified portfolio, you might choose to hold on and allow the situation to play out. Short-term investors with a higher risk tolerance can re-evaluate their positions. While front-running allegations can be damaging, it is crucial to avoid knee-jerk reactions. Monitor the situation, assess your goals, and seek professional advice if needed.