On Sunday, an online news platform reported (attributing it to sources) that SEBI had conducted search and seizure operations in the office premises of Quant AMC. The operation was supposedly conducted on suspicion of front-running operations. The AMC has acknowledged that it has received inquiries from SEBI and that it has been cooperating with the regulator in the review.
Front running is an illegal practice of using non-public information about a company (traded in the market) to make a trade for their own benefit, ahead of a larger order that will affect the stock price. In a fair market, the assumption is that everyone gets the same information at the same time. But in front running, someone sneaks to the front using special knowledge to get an unfair advantage.
From the reading of the article, it appears that there were other front-running beneficiaries to the AMC’s trades. So our assumption here is that relatives or friends of insiders in Quant benefitted from such front running, if such an allegation is indeed true.
In 2020, different entities were slapped with fine by SEBI for front running trades placed by HDFC AMC. A similar issue surfaced in Axis Mutual Fund in 2022. While in the case of HDFC AMC not much damage was done, Axis AMC faced significant outflows and also a fall in price of stocks that were suspected of being targets of front running by the individuals.
Impact of this news
While this news has been confirmed, the details of any front-running activity, any regulatory action and the impact is not known. However, the risk of such news is two-fold:
- There will be redemption pressure for the AMC’s funds.
- The stocks (if disclosed or rumored), on which such front running was allegedly done may come under selling pressure.
We are more worried about the former. For an AMC like Quant (unlike the larger ones we mentioned earlier), with a good proportion of mid and small-cap stocks or low float stocks, high redemption pressure can start impacting NAV and cause damage to the remaining investors.
It is noteworthy that a large AMC like Axis Is yet to see normalcy restored after similar incident in 2022.
Action needed on Quant AMC funds
We have 2 Quant funds in Prime Funds. They are:
- Quant Active, under Equity – High risk Turnaround, meant as a tactical play
- Quant Absolute, under Hybrid – Moderate risk
Other than these two funds in Prime Funds, our Buy/Hold/Sell recommendations have a few Buys on Quant funds.
We are now uniformly issuing an EXIT call on all the equity and hybrid funds of Quant AMC, whatever be their call earlier. The two Quant funds in Prime Funds will be removed as well. We have left the Prime Rating on all Quant AMC funds unchanged as the rating is based on performance alone and is quantitative in nature. You should check for our ‘Call’ on the funds (in MF review tool old style or Portfolio Review Pro), rather than the Prime Rating.
This call may seem rather hurried; however, in our opinion, simple news like this, the actual impact of such front-running notwithstanding, can cause enough damage to sentiment in the AMC and impact redemptions. An exit is further necessary in Quant funds given that many of their stocks are momentum plays, and sudden redemptions and disruptions in inflows can have a greater impact on such strategies.
You might want to wait and watch how events transpire, before taking a call. Our stance, however, remains an exit, taking a conservative view and the bigger potential fallout if the news is indeed confirmed and as details emerge. Do note that for the two Prime Funds, we have clearly stated that exposure should be very limited given the risks, and to avoid using them as part of your core portfolio. Hence, we do not see a big downside in terms of tax impact in your exiting these funds. We would also rather you err on the side of caution, even with the tax impact.
You can reinvest the amount in funds already forming part of your portfolio if they have a Buy call, or in other Prime Funds.
Risk to the call: If this unconfirmed news turns out to be false, then you would incur cost (taxation primarily) on the redemption made.
40 thoughts on “Front-running of Quant AMC – what you should do with your Quant funds”
Thank you for your insights!
It seems that index funds are a good option at least in the ELSS category as ELSS is locked in – even if we want to withdraw Quant ELSS units we can’t – cos it’s locked in! 😕
At least the other Quant funds can be withdrawn if needed [though STCG, LTCG taxes are the cost to be borne by us]
To confirm, index funds are immune to front running scandals right? Because everyone knows what stocks are present in the index, it’s impossible to front run an index fund 🙂
The stocks is an index are not immune to front running. Just that in many key indices, stocks are liquid and hence the risk is low. However, in rare cases like the smallcap 250 which can house illiquid stocks. But when the stock prices are bought steadily higher then it starts showing in tracking error at some point. So the risk is low but not nil. THis is why it is important to check the tracking error as well in smaller indices. Vidya
Thank you! Yes, it is best to stay away from indices housing illiquid volatile stocks. An investor in index funds must ensure that tracking errors are reasonably low and expense ratios are reasonable as well.
This can happen to any actively managed fund right? So retail investors are better off sticking to just index funds? Don’t you worry that some of the funds rated ‘Buy’ today may also suffer a front running scandal in future? If Prime Investor recommended funds also turn out to be involved in front running scams, on what basis do we trust a fund house to have proper integrity then ?
Your point is very valid. Even large fund houses like HDFC and Axis had front running issues. We can at least take comfort that they will spend to put processes in place. In small AMCs, this will remain a challenge unless SEBI monitors them more closely. Whether PI recommended funds or not, the challenge is VERY REAL 🙂 Vidya
Indeed. Thank you for your advice🙏
It seems that index funds are a good option at least in the ELSS category as ELSS is locked in – even if we want to withdraw Quant ELSS units we can’t – cos it’s locked in! 😕
At least the other Quant funds can be withdrawn if needed [though STCG, LTCG taxes are the cost to be borne by us]
To confirm, index funds are immune to front running scandals right? Because everyone knows what stocks are present in the index, it’s impossible to front run an index fund 🙂
How long does it take to moderate my comment?
Sir, We try to check periodically but there is no separate resource to do this every minute 🙂 For specific queries we encourage our customers to use this link: https://staging.primeinvestor.in/contact-us/ so that a ticket is raised and we don’t miss it. thanks, Vidya
Dear Prime Investor team,
Don’t you think this is a knee jerk reaction? Also how can nay investor trust other Buy calls given by PrimeInvestor if such a call is overturned to a sell call on just a single day’s notice?
Sir, when calls are turned into sell calls they are either due to performance or fund management concerns or governance issues 🙂 How can governance issue be watched for several quarters. Whether the quantum is small or high, no front running happens without poor checks in place. To that extent, we have to keep away from such AMCs. These checks are known to only one entity – SEBI, not us. So only when they come into the picture, we get to know things are not ok. We can only judge performance or watch for performance pick ups. Not governance issues in MFs. thanks, Vidya
Ok thanks. Governance issue can really blindside investors and hit us like a truck with no warning I guess..
I appreciate the risk management call given by PI. I am new to investing. Hence I seek some more clarity on the issue. I understand that in front running some undue benefits are attained by someone by placing order in advance of the general market.Scale of the orders placed by an unauthorised person in front running will be small compared to the order placed by the fund house or the general market. This should not have affected the performance of the fund itself . If the performance of the fund is not affected why the investor should exit from the fund ? It is a different matter that persons exit in panic when such malpractices are noticed especially when reputed teams like PI give the calls. The fund house may not be able to handle such mass redemption requests causing dent in its performance and consequences.Perhaps ,without such redemption pressures ,the fund house may have navigated the storm without any impact.
I would also like to know whether such exit calls were given during the Axis Bank and HDFC Bank mutual funds front running incidents in 2022 and 2020 and if not ,differentiating circumstances leading to the present call may be given. It is further mentioned that Axis Bank mf is not back to normalcy even after 2 years of the episode. Can PI elaborate on this ? Is it in terms of return , inflows ,outflows or any other criteria?
hello Sir, – our call was based on the redemption pressures that will slowly come by if there is some truth in these search and seizure operations. However, it is not true that the person who acted on such front running alone benefits. What happens typically is since the trades placed ahead will push up the price and place the AMC (who has been subject to front running) at a disadvantage on price. That means there is typically an imputed loss for the investor (as stock prices could have been better). So it is primarily for this reason SEBI prohibits front running. Thanks. Vidya
We have Quant Liquid Fund in our portfolio. Should I exit from that as well?
The call in on equity and hybrid funds alone. We don’t have a buy specifically on liquid but it should be easy for the fund to sell for redemption there. thanks, Vidya
Hi Vidya. I’m not sure that I understood the latter part of your comment. Could you kindly clarify? Thanks!
Liquid funds have very liquid investments in recent years (after SEBI made changes). So there will not be liquidity issues in that category is what I meant sir. thanks, Vidya
Very good risk management call by Prime Investor. Bit worried about expectations from equity instrument by many of us and how people will react if market corrects by 30 to 50% for whatever reason(Fed – US , Geopolitical – China – Taiwan or something else). Initial fall of 5% – every one will buy the dip (Throwing the towel – including me 🙂 ). Some more fall – again people will try to average. When market goes on free fall (like 2008 or Greece or Fed tightening or anything else), some will panic and redeem, some will say “Equity” is all gamble and say to themselves not to invest in equity any more. People will redeem as soon as invested capital turns green.
Hope in such instances please do not blame portal like this who are suggesting best fund available currently in Market .
Personally surprised by our people believe in the Equity as an instrument over last 4 years (Low interest rates may be the reason, surprise good market returns & China has done badly). Personally feel that Mutual funds are also trying to hold the Market for some time to avoid retail exodus.
I have been investing for some time (Two decades) now. Have good portion in equity, hardly track now and made few mistakes on buying sectors which fell the most in 2008 (Subprime).Please search and read about – India growth story, Decoupling theory etc in 2008 to understand how it all matches to current narrative going on in Media.
Main point which I am trying to drive is – understand Equity will go down and will do so very quickly. You will be down 40 to 50% easily in 6 months and everything will become suddenly very pessimistic.
Best of luck to all and understand services like this to invest in above average fund or stock based on factors & fundamentals. Expect 10 to 12% on long term(10 year plus) which is a very great return.
Please do not blame or argue with anyone including Mr Market. Sorry for a long post.
Many thanks for sharing your experience. Not many will have the rich investing experience of 2 decades that you possess! Thanks, Vidya
Unable to resist chipping in with my piece of mind. I find it disappointing to see people’s reactions and comments to the SELL call of PI team. I am fully going to go along with PI team advice here since they clearly want us, investors, to better be safe than sorry. If anyone plans to hold onto the funds, yeah it’s upto the individual to make his/ her choice. Ultimately it’s your money and you can play with it. But as a researcher and advisor, and with a team of vast experience, PI gives us their best recommendations and what they think is best for us. It’s ultimately we as investors who can make the final decision. Hence instead of posting comments like “knee jerk reaction”, “short sightedness of PI”, let’s appreciate the timely manner in which PI is keeping us updated and giving out the best possible advice in such scenarios.
Thank you for sharing your thoughts and for your kind words 🙂 We do the best we can. regards Vidya