Low equity volatility spurs growth of systematic hedge funds
Around 40% of hedge funds established in 2016 were “systematic”, or reliant on computer models and algorithms for trading, according to financial industry data company Preqin. The rise in systematic trading is due to low volatility in the equity market, which is currently at the lowest point it has been for the past 50 years. Trading firms and start-ups are turning to AI to make quant-driven investments to counter the downturn.
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 GOOG GOOGL, Facebook Inc FB, Apple Inc. AAPL, Microsoft Corporation MSFT, Amazon.com, Inc.AMZN and International Business Machines Corp. 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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