According to an article in the Financial Times, computer-driven hedge funds have, for the first time ever, joined their human counterparts as top-performers in the industry. Their admittance to the list of top 20 best performers is an exciting and somewhat startling indication of the challenges technology will pose to traditional, human investing.
The three computer-based hedge funds breaking new ground are DE Shaw, Citadel, and Two Sigma. All of these use algorithms to make trades. DE Shaw placed number 3 on the list, Citadel at 5, and Two Sigma at 20. Together with Bridgewater’s Pure Alpha Fund, which also utilizes a systematic element to make trades, these newcomers have earned investors a stunning $90 million in gains over the last decade.
This should come to no surprise to industry insiders, who have seen the hedge fund industry shifting from purely discretionary methods to systematic methods that analyze big data to make decisions. It’s clearer now more than ever that computer-based trading is not only efficient, but highly capable.
Still, the top 20 hedge fund managers when taken together did not have the best year, generally underperforming in spite of high fees. According to Rick Sopher, Chairman of LCH Investments, “Even the managers with the greatest long-term records did not perform strongly and their results were no better than the average” in 2016.
The future of hedge fund management will likely include more and more algorithmic trading. According to Business Insider, one in five American-based investors has shown interest in what they call “quant/relative value” strategies, up from just 13 percent five years ago. This is especially true in the fast-pace world of hedge funds.
But that doesn’t mean that computer-driven hedge funds are always the best bet. As Bloomberg reports, some hedge fund clients dumping humans for computers are still losing money.
While it’s unlikely trading will be totally automated, it’s obvious that this trend is gaining power. We can expect to see more firms add system-based capabilities to their repertoire at least in part. Investors, take note.