Over the years, everyone from average investors to Nobel Prize-winning economists have tried to discover the secrets of risk-free riches from the stock market. Time and time again, promising strategies that seemed to work for a while eventually flamed out and fell back to earth.

Quantitative mutual funds are one of the latest examples of this phenomenon. These funds use a variety of proprietary trading models to discover ways to outperform the market. Bearing some similarities to the techniques that hedge funds use, quantitative funds try to bring high returns to ordinary investors who lack the wealth to gain access to hedge funds.

Taking emotion out of the game
One smart aspect of quantitative strategies is how they attempt to remove uncertainty from the investing equation. Investors who focus on fundamentals to determine their investing decisions can never be completely confident that they know everything they need to know about a stock. That lack of confidence opens the door to emotional reactions to unexpected news, which in turn can cause you to make big mistakes.

On the other hand, a purely mechanical method for deciding which stocks to buy at what times would eliminate the danger of mistakes caused by human anxiety. As long as you believed strongly enough in the computer models your quantitative strategy used, you could follow the strategy's instructions simply and efficiently. And as long as the models worked, you'd make money.

Crashing into the bear
Perhaps because of those benefits, quantitative funds gradually gained in popularity over the years, increasingly using more sophisticated computer models. A host of fund families, including Vanguard, Schwab (NASDAQ:SCHW), and American Century, developed and expanded their quant fund offerings.

In particular, during the years following the end of the tech bust, many quantitative funds exploded in size. For instance, at the Vanguard Group, assets under management in quantitative mutual funds quintupled from $4 billion in 2002 to $20 billion at the end of 2005.

But toward the end of 2007, the success of quantitative mutual funds started to reverse. At the hedge fund level, some quantitative strategies fell prey to overleveraged bets on trends that proved to be more persistent than their models suggested.

Then, of course, the bear market kicked in. The leverage necessary for many quantitative models to function simply disappeared, and returns fell. Here's a summary of recent performance for a selection of quantitative mutual funds:


1-Year Return

3-Year Average Return

Current Holdings Include ...

Vanguard Strategic Equity (VSEQX)




Schwab Premier Equity Fund (SWPNX)



Northern Trust (NASDAQ:NTRS), IBM (NYSE:IBM)

American Century Legacy Large Cap (ACGOX)



Celgene (NASDAQ:CELG), McDonald's (NYSE:MCD)

Bridgeway Ultra-Small Company Fund (BRUSX)



Almost Family, Einstein Noah Restaurant Group

Source: Morningstar.

The end of the road?
Of course, just looking at the past year or even three years of experience shouldn't automatically persuade you to sell a fund. And while many quantitative mutual funds don't have long track records to consider, both the Vanguard and Bridgeway funds mentioned above do -- and they've put in above-average performance over the past decade, with Bridgeway at the top of its asset class.

For now, then, it's premature to count out quantitative mutual funds entirely. Theoretically, changes in market conditions should give computer models new data to analyze, allowing them to develop better strategies that should behave better even in situations like those we've seen lately. Although leverage-based models may not recover immediately, alternative strategies might take advantage of the fear that the stock market's crash has caused.

However, what has likely been disproven is the idea that any one investing strategy will always manage to avoid losses while delivering outsized gains during strong markets. Any promise that quantitative mutual funds had in being the perfect investment is long gone -- but the future may help them regain some of their lost luster.

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Fool contributor Dan Caplinger loves adding numbers. He doesn't own shares of the companies mentioned. The Fool has written put options on Nasdaq OMX Group, which is a Motley Fool Inside Value recommendation. Charles Schwab is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy always gets its math right.