Trends in the Quantitative Hedge Fund Space - Machine Learning

Written by Des Hartigan

Across all sectors and workplaces, proposals of new procedures focused around innovation and technology arrive eventually. Within the Hedge Fund space, specifically the Quant side, it seems Machine Learning concepts and the utilisation of Computer Analytics are being incorporated more and more frequently. According to “Eurekahedge”, it seems these machine learning funds have been making significant strides forward in terms of success and growth. This is evident when compared directly against “traditional quant” funds in similar asset classes and areas.

Many would agree that one bad year would not hold enough significance in relation to results and correlations, however, this has been the case since approximately 2010 (Valuewalk, 2017).


Factor #1 – Saturation

If you take 2016 as a whole, many saw a “flat year” as success. This influx of quants into the market has ultimately meant returns are shared. To put it in simple terms, the pie is being shared among more people.


Factor #2 – The ability to adapt

The algorithms used by quants monitor has happened before in the market and adapt to any changes when they see fit. Modifications before, during and after trades are made is where AI strategies have seen the most success (The Guardian, 2016). Moving away from a focus on back tests, and delving deeper in the causation and the correlation


What next?

Unprecedented market events (Trump and Brexit being the easiest examples), innovation in tech and a new focus on big data are turning the table on how the game is approached. Servers are moving to the “cloud” while marketing has gone ever more digital. All of this means new jobs and approaches to business development in the financial space. “Machine Learning data scientists” and “Algorithmic Traders” are becoming more and more sought after. Many of which coming from Blue Chip Tech companies such as “Facebook” and “Google”. From experience, it seems the bigger Hedge Funds now want data scientists and Developers/ Engineers to build quant models that learn and grow as it is fed information and statistical data. 

 

This new breed of machine learning quants doesn’t come from the typical “white collar” background with big ties and sharp suits. Instead, they have Olympiads, can develop problematic theorems with ease and come dressed in flip-flops and shorts. This everchanging trend in the quant space, provides fresh challenges. The late John F. Kennedy had a compounding perspective on change which can be seen below:

“Conformity is the Jailer of freedom and the enemy of growth”

John F. Kennedy (35th President of the United States of America)


It will be interesting to see how Hedge Funds react to this change, being proactive to most developments typically has been seen to have a greater chance of success. Adam Honore, CEO of MarketTech LLC, has been quoted saying the “best firms” are the ones that adapted to these changes years ago (Investor Daily , 2017). Keeping advantages secret and protected, and immune to alpha dissipation is and has been the way to make money for quite some time. So maybe the Hedge Funds that prepared for this trend years ago, are the ones for will see the biggest piece of the pie for the near to mid future. 



Des Hartigan
Executive Search Consultant
PARAGON Alpha
Email: desmond@paragonalpha.com
Tel: 01 874 6770