Are the days of fundamental hedge fund management coming to an end? According to a report from Preqin, a company
that provides financial industry data, 40 percent of hedge funds created in 2016 were “systematic,” meaning that they rely on
computer models and algorithms to make trading decisions.
Established trading firms and startups are starting to explore whether trading techniques that utilize artificial
intelligence can help them outsmart traditional traders. Historically, low volatility in the market is making things difficult
for fundamental long/short equity managers.
Changing Strategy For A Changing World
“When you look at the volatility of the equity market right now, it is the lowest it has been in 50 years. That is a very
difficult market for fundamentally driven managers,” Don Steinbrugge, hedge fund industry analyst and CEO of Agecroft Partners, told Benzinga. “A lot of investors are looking for uncorrelated
strategies and a lot of them are quant driven.”
Steinbrugge noted the market is seeing a shift away from the hedge fund industry, partly because capital markets are very
expensive with P/E ratios above historical averages despite particularly low earnings growth.
Hedge Funds, Financial Firms And The Tech Market
According to a report by MIT Technology Review, the past
couple years have seen a “tremendous resurgence of interest in artificial intelligence, thanks to new machine-learning techniques —
especially deep learning — that have made computers capable of human-level perception of images, text, and audio. Now the question
is whether AI can do the same for financial data.”
Hedge funds and financial firms are competing with companies like Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL), Facebook Inc (NASDAQ: FB), Apple Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Amazon.com, Inc.(NASDAQ: AMZN) and International Business Machines Corp. (NYSE: IBM) to attract the next generation of talent to move this technology
forward.
“Quantitative managers have done pretty well recently, and there is a number of quantitative managers are generating independent
returns and people are looking at those to help diversify their portfolio,” Steinbrugge said.
When asked whether the future of fundamental trading is coming to an end, Steinbrugge concluded, “I think active management does
work, but I do think that most active managers under perform.”
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