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Hedge funds have long been among the keenest technologists, whether as early pioneers of algorithm-based investment strategies, or enthusiastic adopters of evolving cybersecurity and trading software.

2020 has seen the industry effectively employ an assortment of remote systems to nimbly adapt to the home working environment during the coronavirus pandemic, while many of the industry’s best-known names are rapidly building their presence in the booming digital currency space.

This week once again demonstrated how hedge fund managers, on the hand, continue to draw on scientific knowledge and advances to inform their portfolio-building processes, while on the other, cast a contrarian eye over how technological breakthroughs are used to play the markets.

Privium Fund Management, together with software developer Swarm Technology, has unveiled a unique new AI trend-following strategy which takes inspiration from insect colonies.

The novel machine learning trading system – which notched up double-digit returns in pre-launch back-tests – employs investment processes designed to mimic the “swarm intelligence” behaviour of insect colonies to trade futures markets, with the collective, in theory, outperforming the individual (in this case, portfolio positions).

Hedge funds are also, it should be remembered, antagonists and cynics – at times stubbornly (and proudly) so.  With some justification: this industry’s sceptical side, and eagerness to go against the grain, has memorably helped drive many of its participants to stratospheric gains on more than a few occasions over the years.

That contrarian streak was on display again this week at Argonaut Capital, the equity long/short fund never shy of playing Devil’s Advocate in markets. 

As many hedge fund managers of all strategy types position for a speedy economic recovery, accelerated by the rapid roll-out of the coronavirus vaccine, Argonaut chief Barry Norris maintains his resolutely bearish stance on the recent breakthrough announcements, building shorts against AstraZeneca and expressing doubts over any vaccine-driven “silver bullet” recovery in the new year.

Meanwhile, just as the advanced computer-based hedge fund models appeared to have shrugged off their impenetrable ‘black box’ image among cautious investors, a new under-the-bonnet exploration by Man FRM has flagged up how such machine-based factor systems are malfunctioning under new and unpredictable stock market drivers (namely Covid-19).

It’s worth remembering how quickly the immediate post-war zeal for scientific advancement gave way to societal angst and fear of technology in the latter part of the 20th century (brilliantly captured in enduring cultural artefacts as diverse as Rod Serling’s The Twilight Zone, Stanley Kubrick’s 2001: A Space Odyssey, and James Cameron’s The Terminator).

The growing tech-spend at managers of all sizes suggests the hedge fund industry may not have reached that level of techno-fear just yet. 

But as Man FRM astutely observed in this week’s ‘Early View’ commentary: “Even if it is only to point the machines in the right direction, we may still need humans in this game for some time yet.”

Hugh Leask
Editor, Hedgeweek

 

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