The humans are losing, the computers are winning, and the hedge fund game is changing.
The hot topic in hedge fund land right now is the rise of the computer-driven investing, or funds which use complex mathematical models to bet on markets.
It seems to be the trend of the day at a time when many traditional hedge funds are getting crushed. And some indicators show that they are taking in investor money from other strategies.
A Goldman Sachs report obtained by Business Insider, for instance, says that quant/relative value strategies are seeing increased interest from investors. One in five Americas-based investors noted they were looking for systematic strategies in the second quarter, the report said. That’s a big increase from just a year ago, when only 13% of investors were interested.
And in a report out earlier this month, Barclays found that investors in hedge funds are most interested in systematic/CTA funds and quant equity funds right now.
CTAs are “commodity trading advisors” that are predeominantly computer-driven and trade in managed futures — futures contracts, commodity options and the like. Quant equity funds use quantitative data to pick stocks. The survey took in the views of 340 investors managing about $8 trillion in total.
There have been high-profile quant fund launches, too.
Schonfeld Strategic Advisors, a multibillion-dollar family office and hedge fund, backed a new quant firm earlier this month
. A former First Boston CEO and Bank of America director are setting up a new quant fund, HFM Week reported.
Some existing smaller managers say they are benefiting from the shift, getting more checks from investors.
“As in 2008 and 2011, we suspect this environment will be challenging for the levered beta riders (aka fundamental ELS stock pickers) but should be supportive of the quant process driven discipline,” Milind Sharma, who manages a quant strategy at his New York firm QuantZ Capital, told Business Insider.
The interest in quant strategies has been playing out for a while, and has been driven at least in part by performance. One of Sharma’s funds, for instance, was up 19.1% and 9.9% in 2015 and 2014 respectively, according to an investor update. It’s down -7% this year but the firm is still gaining interest, Sharma said.
This is opening new doors for quant traders, and forcing the old guard to adapt.
The Financial Times’ Robin Wigglesworth profiled DIY quant traders on Quantopian, a quant platform that Steve Cohen has invested in. One of the Quantopian’s traders helps run a London-based Mexican restaurant chain by day, and does quant investing — for which he had to train himself in Python code — by night.
Some of the biggest names in the hedge fund industry are having to adapt, meanwhile.
Paul Tudor Jones, who is cutting 15% of his firm amid underperformance and investor withdrawals, has been contemplating using more computer models in investing.
According to Laurence Fletcher and Gregory Zuckerman at The Wall Street Journal, Jones tried to prepare staff for the future of data-driven investing aided by computers.
This tweet from Dennis Berman, business editor at the WSJ, pretty much sums it up.
— Dennis K. Berman (@dkberman) August 17, 2016