Market regulator Securities and Exchange Board of India (SEBI) has launched an investigation into potential front-running activity at quant mutual funds (MF), casting a shadow over one of India's fastest-growing asset management companies (AMCs). This development has sent ripples through the investor community, particularly those with holdings in quant's various mutual fund schemes.
quant MF, founded by Sandeep Tandon, has experienced meteoric growth since receiving its MF license from SEBI in 2017. The fund house's assets have skyrocketed from around Rs100 crore in 2019 to nearly Rs90,000 crore currently. By January 2024, it had crossed Rs50,000 crore in assets, boasting a portfolio of 26 schemes and 5.4mn (million) folios. The fund's performance has been particularly impressive in the small-cap category, with its scheme managing over Rs20,000 crore and ranking as the top-performing scheme over the past three- and five-year periods.
The allegations of front-running, a deceptive practice where someone with advanced knowledge of upcoming trades uses that information for personal gain, have raised serious concerns. The estimated profits from these alleged operations are close to Rs20 crore. However, the exact nature of the allegations and the potential involvement of management remain unclear.
In response to the news, stressed investors redeemed investments worth Rs1,400 crore in just three days following SEBI's investigation announcement. Many question whether to continue their investments or stop ongoing systematic investment plans (SIPs).
On 26 June 2024, Mr Tandon, quant MF's founder and chief investment officer (CIO), held a Zoom call with investors and stakeholders. While not providing specific details about SEBI's investigation, he sought to reassure participants about the fund's liquidity position and risk management capabilities. He stated that, as of 26 June 2024, cash and liquid investments comprised 53.49% of the closing equity assets under management (AUM) of Rs88,270 crore.
To address investor concerns, quant MF has released an FAQ addressing key questions:
1. SEBI enquiry status: The enquiry is ongoing and part of the regulator's routine data collection and analysis process globally.
2. Convictions: No one has been convicted. The fund has not received any communication after initial enquiries.
3. SEBI presence: No SEBI personnel are stationed in their office.
4. Office operations: Both Mumbai offices (Prabhadevi and Bandra) are functioning normally at full capacity.
5. Team attendance: All team members, including sales, investment, dealing, finance, IT, and others, are working normally.
6. Future performance: The fund maintains that their performance should remain consistent with their style, as they are functioning normally.
7. Portfolio liquidity: As of 26 June 2024, cash and liquid investments were 53.49% of closing equity AUM of Rs88,270 crore.
This investigation into quant MF is part of SEBI's broader efforts to crack down on unethical practices in the mutual fund industry. Earlier, the regulator had taken action against Viresh Joshi, a fund manager at Axis MF, and 20 related entities in a front-running case, identifying Rs30.55 crore as ill-gotten gains.
The situation at quant MF highlights the delicate balance between rapid growth and maintaining ethical standards in the financial industry. While the fund's performance has been exceptional, particularly in the small-cap segment, the front-running allegations raise questions about the integrity of these past returns and their potential impact on future performance.
As the investigation unfolds, investors and industry observers will closely watch for any developments that could impact quant MF’s operations and India's broader mutual fund landscape. The outcome of this case could have significant implications for regulatory oversight and investor trust in the rapidly growing Indian mutual fund sector.
