The inquiry by market regulator Sebi into a possible front-running case involving a Rs 93,000 crore Quant Mutual Fund has many investors concerned about what will happen to their money.
Sebi has seized mobile phones, computers, and other digital devices during raids on Quant’s Hyderabad facilities and Mumbai headquarters in order to identify the person(s) who leaked private information from the asset management company in order to profit illegally. In this case, ET stated, there is suspicion that the AMC placed an order through a broking firm or a dealer from a Quant entity.
What Is Front Running?
Front-running is the practice of a person, typically a broker or insider, making a trade ahead of time using confidential information. It would be considered front-running, for instance, if a broker purchases some shares in his personal account prior to the completion of a transaction, knowing that a large client is planning to purchase a significant number of shares of the company.
In addition to being unethical, the activity is prohibited by law and is against Sebi regulations.
Quant Mutual Fund Executives Shared Confidential Information?
Sebi’s surveillance system indicated a case of front-running by suspected entities who were privy to what Quant Mutual Fund was going to buy or sell. It is suspected that Quant executives who knew the size and execution timing of the orders may have passed on confidential information regarding the impending trade order to suspected beneficiaries, ET reported.
The AMC said it will provide all necessary support and furnish data to Sebi on a regular and as-needed basis. In the most recent instance involving the asset management sector, Sebi prohibited the dealer of Axis Mutual Fund and twenty other organizations from participating in the securities market, resulting in the impoundment of unlawful gains valued at Rs 30.55 crore. A front-running case at HDFC Mutual Fund was also revealed back in 2007.
Vivek Bajaj of StockEdge posted on social media platform X, saying, “I have seen the mutual fund industry since 2001 (my first job), and I know that front running has been part of it for donkey years.”
How Does Front Running Impact Quant Mutual Fund Investors?
The bad news flow could put pressure on the fund house to redeem assets, which would lower NAVs. Smallcap equities that Quant MF held substantial positions in are similarly susceptible to selling pressure.
According to Kirtan Shah of Credence Family Office, “there might be selling in mid & small stocks that Quant holds and expect some underperformance by the funds in the near term.”
If Sebi discovers front-running, there will be redemptions, which will result in short-term underperformance; but, their stock selection procedure has been effective, he stated on X. From a redemption standpoint, he noted, liquidity would not be an issue because RIL alone accounts for about 10% of the holdings in both the smallcap and midcap funds.
Prime Investor, a company that offers advice to investors on mutual funds and other products, has called for a departure from all of the AMC’s equity and hybrid funds, citing the possibility that the announcement will negatively affect investor mood and redemption rates.
“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,” the consulting company advised investors.
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