Business Insider: Hedge funds looking to spot and ride market trends are hoping for a fresh start
IF SOMETHING has not worked for five years, most people would conclude that it was broken. Tell that to the geeks managing “quant” hedge funds, who craft elaborate algorithms to profit from market movements. Once money-spinners, their prized formulae have misfired since 2009, losing money in four of the past five years. Unless their results improve markedly, the giant funds will finish this year as the worst-performing of the most common hedge-fund strategies.
“Trend-following” involves programming computers to analyse market movements and try to infer where they might go next. Practitioners speak with reverence of “crossover levels” and “momentum speeds” leading to “breakout points”. A rough translation is that a trend that lasts a few days or weeks can profitably be invested in until it reverses, at which point a new trend may already be forming. Whether the markets are going up or down does not matter. Nor does the underlying asset being analysed–typically a futures contract linked to a commodity or a security.
After prospering through the market rout of 2008 (the prolonged slump gave even the dimmest trend-follower time to cotton on), the sector swelled from $91 billion to $215 billion, according to Hedge Fund Research, a data provider. Winton Capital, Man Group’s AHL fund, Cantab, BlueCrest and other “black box” traders, as their critics dub them, became darlings of the investing world. Unfortunately, the influx of investment coincided with the reversal in the strategy’s fortunes (see chart).
