Computer-Driven Hedge Funds Surge Ahead Amid Chaotic Markets

A $200 billion corner of the hedge funds industry dominated by computer-driven algorithms has been making the most of wild swings in global markets, putting many of those funds on course for a record year of gains. From a report: Aspect Capital's Diversified Programme returned 5.2% last month to bolster its gains for this year to nearly 44%, according to an investor document. Tulip Trend Fund rose more than 58% through September, while the Lynx fund was up in excess of 45%, according to updates on their websites. The funds, which use computing power to analyze vast amounts of data to predict the direction of stocks, bonds, currency and commodities markets, are emerging as one of the biggest winners among hedge fund strategies this year as soaring inflation and rising interest rate spark the volatility they thrive on.

Really?

[Drethon]

Can't see the paywalled article, but unless I'm looking at something wrong (this is the fund they are talking about right?), it looks like they are playing catchup after totally borking the COVID market crash: https://www.rcmalternatives.co... [rcmalternatives.com]

Admittedly this data does stops before the SP500 tanked this year, but overall, I'm not sure I'm that encouraged by the Aspect Diversified Fund.

Re:

[RobinH]

People sitting around playing poker on the weekend aren't affecting the efficient allocation of capital, and neither are these gamblers. Don't worry about it. They didn't skim it off you or me. They skimmed it off some day trader who got skittish, or whatever.

They send orders to Madoff land

[Revek]

Or you can call them dark pools if you must. It allows them to manipulate prices since they can process the orders anyway they like with no oversight or transparency. PFOF is tool that Madoff created. Its a perfect way to manipulate the stock market and its being allowed by the FED because they can use it to their advantage as well.

Re:

[Revek]

The SEC isn't going to do anything the FED doesn't want them too. The SEC has had their ability to enforce fines curtailed without going to court. The SEC leadership is made up of former wall street brokers and bankers. Just like the FED.

I'm curious as to why you think there isn't any manipulation but I might not be speaking the sharpest pencil in the box.

The models have figured out how to make the swings

[AmazingRuss]

... that the models profit from.

Re:The models have figured out how to make the swi

[nightflameauto]

This is probably the winner here, sadly. The computers are set-up to do one thing and one thing only: maximize profit. How best to do that? Manipulate transactions to cause wild fluctuations that can be accurately predicted by the computer, making billions of transactions per second, but never predicted by a human. A recipe bound for success in so many ways.

I'm sure there won't be any negative consequences. Nope. No sire. No way. Computers + financial manipulation gotta be a good thing. Right? RIGHT?

Re:

[neilo_1701D]

This is probably the winner here, sadly. The computers are set-up to do one thing and one thing only: maximize profit. How best to do that? Manipulate transactions to cause wild fluctuations that can be accurately predicted by the computer, making billions of transactions per second, but never predicted by a human. A recipe bound for success in so many ways.

I'm sure there won't be any negative consequences. Nope. No sire. No way. Computers + financial manipulation gotta be a good thing. Right? RIGHT?

I'm currently reading The Quants, which detailed these hedge funds in the leadup to August 2008 and the aftermath. You're right; nothing could go wrong. Until it did.

Re:

[igreaterthanu]

Manipulate transactions to cause wild fluctuations that can be accurately predicted by the computer

I work in the industry. This is not true. Prop trading firms specifically do not do this because it lands people in prison. Unfortunately many algorithms such as neural networks learn to do this if you hook them up to the market, so those algorithms are off the table and deliberately not used. Typically a prop trading firm will have a team working on internal surveillance to detect what even might LOOK like deliberately causing fluctuations in order to profit, even if it isn't being done so deliberately.

Re:

[wakeboarder]

No, they have profited from the current market conditions. Those conditions can change. Honestly, if you would have put any money in the market you would have made money anywhere. I would be more interested in learning what their returns are in the next 1 to 3 years.

the other hidden cost

[RemindMeLater]

beyond the inefficiency and wrongness of these grifters stealing fractions of a penny here and there, it's the loss of intelligent people working on something else that gets overlooked. How many hundreds of really bright minds gets sucked into chasing shekels around the board when they could be doing something actually productive for society?

Re:

[nightflameauto]

Considering the focus of the human race itself now? I could totally see the singularity popping into existence with its one and only mission being to maximize profit for some Wall Street shenanigans. We'll probably die in order to better serve that profit first routine, one way or another. Why not through the singularity?

Re:

[igreaterthanu]

"stealing fractions of a penny here and there" is market making not medium-long term trading. This is a story about prop trading firms that use medium-long term strategies, not market making. These medium-long term strategies are good for everyone. For example a trader might expect the price of oil to go up in the future and so buy oil futures. The price of oil futures will then rise earlier than they otherwise would have, which would lead to oil producers producing extra oil earlier that they otherwise wo

post-hoc analysis

[methano]

I suspect this great accomplishment is nothing other than post-hoc analysis. Look at 100 hedge funds. Take the top 5. Look at some common thread. Write an article claiming the common thread is the cause rather than some random descriptor. This happens in all data analysis and is the reason you should never believe articles like this.

I'll give it a 9 on the BS scale.

Re:

[maitas]

Survival Bias

Re:

[ceoyoyo]

*All* the hedge funds should be doing "well" right now. The point of a hedge fund is that you trade poorer returns during good times for some return during bad times. That's what "hedge" means. It's a strategy you follow if you want to prioritize steady income from investments over maximal return.

Re:

[igreaterthanu]

Prop trading firms in general make more money the more chaotic the market is. Why? Imagine an extreme case of the markets staying completely flat. Obviously no money is to be made from trading. Money is made when a firm can either predict the movement of the market in advance (position taking), or by taking the other side of all trades (market making). In the former case more money is made when the movements are bigger (as long as they are just as predictable), and in the latter case more money is made the

Re:

[Ed Avis]

No, these are well established funds that make up the "quant trend following" sector. Most have been around for a couple of decades or more. It's not a case of putting them into a category post hoc. Of course, in any year there will always be some sector or some strategy that has surged ahead...

Every time

[logjon]

Things go to shit, and the rich get richer. Than they get the lower classes to blame each other along racial and sexual lines so we don't look up.

Variable frequency trading?

[Catvid-22]

So is this the smarter version of high frequency trading [wikipedia.org] that not just takes account of the hourly swings and breaking news, but takes a broader week-by-week, even month-by-month view of the stock market?

Re:

[igreaterthanu]

I work for a firm that does both. Very different techniques are used for HFT trading vs. position taking.

For HFT in some cases it's literally pure arbitrage (buy low in one exchange, and sell the exact same thing for a higher price at another exchange) and the speed of light in fibre vs the air matters.

For some cases HFT predicts what trades will happen in the next millisecond or so.

For position taking, much more complex models are used and speed doesn't really matter (no need for microwave links, FPGAs o

Hedge Fund Basics

[gurps_npc]

1) Hedge Funds do NOT try to make profits.
2) They try to Hedge against losses. You buy into one when you are wealthy and scared of going bankrupt (for example, if the market crashes).
3) When the market is going up, they tend to do poorly. Why? Because at heart they are Bearish investments.
4) This year the market has gone DOWN DOWN DOWN. Being a bearish investment, any hedge fund worth anything has made large profits.
5) Wealthy people buying hedge funds are not supposed to be betting against the market (al

Is this why 401k's don't recover when market does?

[rapjr]

Because the hedgefunders are sucking out the money. Same thing probably applies to pension funds.

Computer Trading Should Be Banned

[theshowmecanuck]

Computers should be removed from making trades, and humans put back on the trading floors. Computers hide too much, making it dangerous via malicious intent or by outright fuckups in code.

Of course they will do better

[ayesnymous]

Hedge funds typically include shorting strategies, which will make money when the market goes down. But in most years, when the market goes up, hedge funds lose money.