There's so much hedge fund bashing these days that it makes you wonder: is Business Week readying one of their infamous "death of" cover stories?
We've got academics that think they can do better:
We've got academics that think they can do better:
Computers 'will replace hedge fund managers'Then there is the "passive is the new active" crowd:
The hedge fund industry is set for a move away from active fund management according to a new report because automated trading systems can outperform real managers.
Professor Harry Kat and colleague Helder Palaro from Cass Business School claim to have designed systems that would have outperformed real managers 82% of the time over the past 15 years.
This is the third time Kat has made such a claim in almost 18 months.
The two academics said they tested their mechanical futures trading strategies, which generate returns with the same risk as normal hedge funds, against 2,500 funds of funds.
Kat said index fund management will approach 40% of the hedge fund industry within 10 years, a similar proportion to that of the traditional long-only management industry today.
Kat said: "In the early days, the high fees came on the back of 15% to 20% returns. Things are very different now; hedge fund returns are routinely around 6% to 7%, basically the same as a glorified savings account. If fund managers are taken out of the picture, however, returns can be boosted by 2% or 3%.”
Kat also said that since synthetic funds trade in only the most liquid markets, they avoid other costs associated with alternative investments, including greater due diligence, transparency and "style drift", which refers to a manager's tendency to move away from his original stated investment strategy.
Critics of the research argue that Kat has not invested his own money in the system. However, a spokesman said that as an academic, the Cass professor "does not have the money to invest".
Taking all ego out of investing in hedge fundsEven Ray Kurzweil is obliged to take a stab at it:
"As the hedge-fund industry matures, and it becomes increasingly difficult for many investors to identify and invest in the top-performing hedge funds, passive management should gain wider appeal with hedge-fund investors," Merrill Lynch derivatives analyst Benjamin Bowler said in a recent report.
He notes that with the sharp growth of hedge funds, it is becoming tougher for active managers to excel. In that environment, he said, it's also more difficult for "investors to justify paying hedge fund fees for the performance of the average active manager."
So passive alternatives represent a natural evolution in an increasingly mature industry.
A Smarter Computer to Pick StocksAnd of course, Andrew Lo (no relation) is going to show us all how it's done, by cloning them:
Ray Kurzweil, an inventor and new hedge fund manager, is describing the future of stock-picking, and it isn’t human.
“Artificial intelligence is becoming so deeply integrated into our economic ecostructure that some day computers will exceed human intelligence,” Mr. Kurzweil tells a room of investors who oversee enormous pools of capital. “Machines can observe billions of market transactions to see patterns we could never see.”
According to their paper, "Can Hedge Fund Returns Be Replicated? The Linear Case," the so-called hedge fund clones achieved higher risk-adjusted returns than certain types of hedge funds. But some strategies, such as convertible arbitrage, were not possible because investment products didn't apply. The passive clones provided an annualized return of 12.8 percent compared with 14.2 percent for the full array of hedge funds over 18 years.Now, would these please stop talking and make money for the clients for a change?
Teresa_Lo - am 2006-11-28 21:38 - Rubrik: Finance
Etaoin Shrdlu (anonymous) meinte am 29. Nov, 03:04:
With a big enough line of credit...
... can you create your own reality, like George Soros said he can in his book? Seriously, if you create a momentum-based automated trading program, and if there are other hugely-endowed hedgefunds doing much the same thing, can they all take the financial markets anywhere they want to? At least for a time? Is that scary, or what? Just imagine, a cohort of LTCMs all having fun together? Why would anyone want to regulate hedgefunds?
Mahalanobis antwortete am 29. Nov, 16:59:
FYI: Hedge funds, Crowding
"Hedge funds employ active, opportunistic and sometimes leveraged trading strategies. They turn their portfolios over far more frequently than traditional funds, so their short-term influence on markets can be larger than the capital under management would indicate [NB: Currently, only about two percent of the liquid financial assets are managed by hedge funds]. Hedge funds generally prefer liquid and “anonymous” markets, i.e. ones that can be entered and exited swiftly at low cost. Their actions tend to be sporadic and, in contrast to traditional funds, they do not need to be fully invested all the time. Efforts to estimate the impact of hedge funds on financial markets are hampered by the lack of good data. Past episodes where hedge funds were reportedly involved are numerous, most of which relate to macro hedge funds trying to exploit doubts about the sustainability of unsound macroeconomic policies or probing shaky currency pegs.Under normal conditions, hedge funds contribute to the liquidity and eff icient functioning of financial markets, but in certain cases, especially in small or medium-sized markets, their actions can be destabilising. Concentration information on OTC derivatives and other less transparent markets can provide an early warning signal on the build-up of concentrated positions in certain markets and can alert market participants to the risks involved.
Another question that often arises is whether hedge funds – through their daily activity– stabilise or destabilise f inancial markets. In this context, two forms of trading can be distinguished: positive and negative feedback trading. The former refers to the buying of financial instruments after price increases, and selling them after price decreases. Such practice can amplify price swings and lead to overshooting or bubbles. Positive feedback or momentum trading can be generated by dynamic hedging, stop-loss orders, similar position-taking by other market participants, forced liquidations related to margin calls or just by simple trend-following strategies. By contrast, negative feedback or contrarian trading can have a stabilising influence on markets. Intuitively, hedge funds should be more contrarian, as only trading against the crowd can be expected to generate persistent excess profits. However, markets are not completely efficient and trend following can, at times, be lucrative. Managed futures hedge funds (5% of total single hedge fund capital under management) are reportedly cited as utilising trend-following approaches, and this is probably the main factor explaining the negative year-to-date performance in rather range-bounded markets. Other directional strategies – global macro (11%), emerging markets (4%), long/short equity (33%) – can be on both sides of the spectrum, while dedicated short sellers (less than 1%) are probably more contrarians. Event driven (17%), market neutral (relative value and arbitrage) (20%) strategies probably also involve the taking of more contrarian views. Hence, it is very difficult to determine whether hedge funds, on average, are momentum traders or contrarians. Furthermore, there are concerns that as the
number of new hedge funds increases, they may be increasingly attempting to exploit the same market opportunities, possibly relying on similar models. The so-called crowding of positions in this way is another form of momentum trading and could have a destabilising impact on both rising and, especially, falling markets. There are indications that certain strategies, such as convertible arbitrage, have reached capacity limits related to market size. Only funds with new ideas or dealing in fledgling sophisticated markets can continue to deliver alpha. According to market reports, the capacity limits of certain strategies or markets makes essentially limitless foreign exchange markets attractive to hedge funds once again. There are indications, however, that the prevailing concentration in the hedge fund industry is not very high, with currently no hedge fund in the market comparable to the size of LTCM in its heyday. This, together with the fact that there are a larger number of active hedge funds, could also mean that the probability and risks of large crowded trades are lower."
Source: ECB Financial Stability Review 2004 (pdf)
