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Most hedge funds utilize highly paid star managers to develop their strategy and invest the client money in the vehicles that match these objectives. Since the financial crisis of 2008, a new and growing type of hedge funds has emerged. These are the trend following computer strategies. Though they have lost money over the last five years, 2016 looks set to be among their biggest and best years as they are significantly out performing their human run rivals.
What Are Trend Following Computer Strategies in Hedge Funds?
Computer programmers came up with algorithm programs that allow hedge funds to automatically invest according to the trends for which they are programmed. Trend following means investing in a strategy that can be continuously pursued for as long as it lasts. This might be for several days or a matter of weeks. Once the trend reverses, a new trend begins to form which can then be followed. This strategy is not concerned with whether markets are rising or falling. So long as they are moving convincingly in a single direction, it prospers. Trend following also is not limited by a certain type of assets. A favorite choice of the strategy is a futures contract that is connected to either a stock or commodity, or a currency pair.
How Brexit Worked Out for Trend Following Computer Strategies
Brexit proved to be a most interesting case for trend following computer strategies. Polls had wrongly portrayed the Remain and Leave campaigns as tied before the day of the referendum. Betting exchanges, bookmakers, and financial markets alike had predicted an easy and comfortable Remain camp win. Practically no one in the investment world had taken serious positions on a Brexit leave vote. Human managers mostly decided to lower their risk going into the referendum vote to play it safe and avoid any potential eye watering losses. The computers opted instead to be heavily invested in the traditional safe haven investments as that is where the trend was already heading.
Big Winners on Brexit Referendum Night Trend Following Computer Strategies
The result of this safe haven trend following turned out to be a major victory for the machines versus man. The average hedge fund lost .18% on the day after Brexit night June 24th. The trend following computer strategies, or systematic strategy firms, instead realized gains of .71%, per the Hedge Fund Research industry data tracking company. Yet some of these computer run strategies which were among the largest in the industry captured enormous gains following the Brexit leave vote results. Winston Capital, the British systematic firm that handles over $30 billion for its clients, realized a substantial 3.1% gain on just June 24th. U.S. headquartered AQR did even better. Its $13.3 billion fund running under computer strategy captured an incredible 5.2% on the single day, a whopping $700 million.
They all had one strategy in common that day. It had nothing to do with them correctly predicting the Brexit leave vote. Each of these systematic strategies were following the safe haven trends already in play. For some of them, this meant taking leveraged long positions on either gold or the Japanese Yen. Others were short higher risk currencies such as the Mexican peso. This particular investment strategy returned over 7% on just the trading day June 24th.
Trend Following Hedge Fund Strategies Leading for 2016
It might be easy to discount this single day impressive success of the trend following systematic strategies if this were only a one off. The truth is that these trend following hedge fund strategies are actually leading the hedge fund universe for the entire year of 2016 so far. This is in part because the markets have shown clear direction for months at a time. The financial world’s uncertainty from January and February sent markets substantially down. This made for profitable systematic computer driven strategies in those crucial first two months of 2016. The periodic lists showing the best performing hedge funds turned out to be dominated by the trend following and systematic strategies. By February 17th, these computer trend following funds had made 7% on the year. Fast forward to five months later in mid July, and the results of these systematic strategy funds are now less impressive at 5.4% but still leading, per Société Générale.
Demand for Trend Following Computer Strategies Growing
Naturally these leading returns have generated plenty of excitement and enthusiasm for the trend following computer strategies with so many traditional hedge funds that use fundamental analysis struggling to be profitable. These hedge funds are typically marketed for the abilities of their professional investment managers to deliver returns that do not correlate with the returns of their other investments. The success for the trend following computer strategy funds has propelled a significant $7.3 billion in new investor funds into them for the first half of 2016, per industry tracking Eurekahedge. This sounds more impressive when you compare it to the hedge fund industry in general’s $15.1 billion in first quarter outflows. This all means that you should check out the more successful systematic and computer trend following strategy hedge funds before giving up on the hedge fund universe altogether.
W.D. Crowder is an American published author. His background and areas of expertise include history, economics, retirement, finance, expatriate living, international relations, investments, and personal finance. A widely read and top of his class graduate of Stetson University, he obtained his bachelor of arts degree in History with minors in Latin American Studies and International Relations and a special emphasis in Economics. He was President of his Phi Alpha Theta (National History Honors Fraternity) Stetson University chapter and a Phi Beta Kappa (National Honors Fraternity) member.
