Daily Management Review

Stock trading computers are not a future anymore


Decisions about investments are increasingly made not by a person, but by a computer. Now, quantum foundations - those in which investment decisions are made automatically on the basis of mathematical models - account for almost a third of all assets managed by hedge funds: $ 932 billion out of $ 3.1 trillion. Quantum funds are actively developing, and conventional investment funds are happy to adopt such technologies. However, experts believe there are also some risks: growing number of quantum funds using the same algorithms and models can lead to a collapse of the stock market.

Norges Bank via flickr
Norges Bank via flickr
Quantum funds that use complex statistical models and computer-based investment solutions have long ceased to be something unusual for the stock market. According to Hedge Fund Research, assets managed by quantum funds reached $ 932 billion in the first quarter of this year. New assets in this period amounted to $ 4.6 billion, while $ 5 billion was withdrawn from conventional hedge funds. Thus, quantum funds account for up to 30% of all assets managed by hedge funds ($ 3.1 trillion). According to The Wall Street Journal, the share of quantum funds in operations on the securities market increased from 13.6% in 2013 to 27.1%. Among the largest quantum funds are Renaissance, Two Sigma Investments, D.E. Shaw Group, PDT Partners and TGS.

Quantum funds make investment decisions on the basis of certain algorithms. Often, founders of such funds are mathematicians, because the algorithms are based on formulas. The possibilities of using mathematical knowledge in trading on the stock exchange first appeared back in the 1970s. One of the advantages of quantum funds is speed. Unlike the traditional situation in the stock market, when a decision is made by a person, data processing and calculations go for fractions of a second in quantum funds. As practice shows, this method usually turns out to be more effective: in the last five years, quantum funds showed an average growth of 5.1% per year, while traditional hedge funds - by 4.3% per year. In the first quarter of 2017, growth was 3% against 2.5% for conventional hedge funds.

Among the popular types of quantum funds are those, which work is based on tracking trends in the market. They monitor dynamics of various investments, growth or fall of oil prices and other events in the market and, on the basis of this data, try to guess the trend in accordance with which they buy or sell securities. The technology of quantum funds is also adopted by traditional investment funds, employing mathematicians and programmers. Increasingly, quantum technology uses machine learning techniques - thus, new algorithms are written not by a person, but by a computer.

According to analysts, among the reasons for the growing popularity of quantum funds is the tightening of the policy of regulators in respect of such questionable but quite actively used practices, like wiretapping negotiations between employees of companies or attempts to get information from top managers of companies. At the same time, the volume of information about companies at the disposal of traders has grown immeasurably - these are various financial and economic data, including changes in the assessment of companies' profits or their debts. Often it is data volumes that become the decisive factor for quantum funds, and they collect such non-standard information as customer polls, gathering data on illegal trade in the "dark Internet" or information obtained with the help of unmanned vehicles.

Although the use of similar technologies in the stock market looks promising, experts disagree on how successful the experience of quantum funds can be. According to The Wall Street Journal, there is a slowdown in the growth of quantum funds. For example, Two Sigma Investments, whose assets are $ 45 billion, showed a 2.5% decrease from the beginning of the year to the end of May, while in 2015 and 2016 it grew by 15% and 10.3%, respectively. Another fund - the Winton Futures Fund - has grown 1.4% since the beginning of the year, last year it declined by 3%, in the previous year it grew by 1%. Nevertheless, so far, the sluggish growth of quantum funds has not weakened interest from investors.

source: wsj.com