The quants are winning.
Hedge funds that rely on computer programs to trade are producing some of the highest returns in the industry after a particularly profitable November. Two Sigma, a $24 billion firm run by a former artificial intelligence academic and a mathematics olympian, rose 10 percent last month in one of its strategies and is up 47 percent this year.
Cantab Capital Partners jumped 18 percent in its main fund in November and has returned 32 percent this year and Aspect Capital advanced 12 percent for the month, doubling its return in 2014.
Scientists, mathematicians and engineers are beating star managers by capturing price discrepancies across markets, making money from a plunge in oil prices and on government bonds that human traders dismissed. The Newedge Trend Index, which tracks firms that that use models to profit from market trends, has advanced 17 percent this year through November, compared with a 3.7 percent gain for funds across strategies.
“Discretionary traders did not see value in buying and holding sovereign bonds in the U.S., U.K. and Germany,” which benefited quantitative funds, said Anthony Lawler, a money manager for GAM Holding, which invests in hedge funds. “Short energy was a large winning trade, whereas discretionary traders were by and large not in,” he said, referring to bets against the industry made by human decision-makers.
Quants are succeeding as some of the most well known stock and bond pickers struggle in forecasting the outcome of corporate mergers or gauging the impact of central bankers on markets. Richard Perry, Jeffrey Altman and Paul Tudor Jones are underperforming equity and credit indexes this year; billionaire John Paulson has lost 27 percent in his event-driven fund and hedge funds are closing at a rate not seen since the financial crisis.
Jim Simons, a former military codebreaker and chairman of the mathematics department at Stony Brook University, is regarded as a pioneer of investment strategies that use computer models. He formed a firm that became East Setauket, New York- based Renaissance in 1977 and hired scientists and engineers to mine data from financial markets looking for relationships among stocks, bonds, derivatives and commodities.
Assets overseen by quants have more than doubled to $796 billion since 2008 after the firms returned 21 percent that year, according to Hedge Fund Research Inc. and Newedge’s trend- following index. The average hedge fund declined 19 percent, according to data compiled by Bloomberg, and the Standard & Poor’s 500 Index dropped 38 percent.