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Investing into disruptive innovation

Investing into disruptive innovation

AI, predictive analytics and automated trading are just starting to be embraced by hedge funds


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Lightning in the night sky

While technology may be driving the next wave of competition in the hedge fund sector, our survey suggests that most managers are taking a somewhat pragmatic approach to implementing new technologies and disruptive innovations such as artificial intelligence (AI), predictive analytics and automated trading. Yet there are a small but growing number of managers that are actively embracing innovation and, in doing so, they are creating new opportunities for competitive advantage. 

Staying with the pack

While ‘quant strategies’ account for just 20 percent of the hedge fund universe, a significant number of managers (32 percent) are already using predictive analytics to uncover new trends and identify new opportunities. There are different view of predictive analytics. “We’re not a quant shop in any way, but we are certainly looking for patterns and trends that can help us generate unique alpha,” noted the CFO of one large fund. “Predictive analytics can make a good trader even better and provides a big edge to our investors.” This suggests a new landscape for quant investing is emerging where new technology led strategies are starting to play a more central role.

Any room for robots?

Technologies such as AI and machine learning are also expected to have a transformational role with 58 percent of managers saying these technologies will have a medium to high impact on the sector. “AI is going to continue to make inroads in the sector,” noted one interviewee. “There’s a very strong business case for replacing humans with algorithms in a lot of areas of the business.”

Almost three quarters of respondents say they expect automated trading technologies to have an impact on hedge fund returns over the next 5 years. There are some skeptic, as 26% say it will have either negligible or no impact at all. This is in direct conflict with recent media reports which suggest that ‘systematic strategies’, CTA funds and quant equity funds are in high demand by investors. According to one report, demand for systematic strategies almost doubled at Goldman Sachs in the second quarter. A report by Barclays also noted a high level of interest in systematic strategies.1

“The ability to have over-the-counter transactions cleared centrally rather than picking up the phone to execute the trade will have a massive impact on the sector,” noted Adam Hirsh, KPMG in the US. “More to the point, regulation is clearly driving away from bilateral agreements and towards substantially cleared trades which, in itself, will drive major uptake of automated trading over the coming years.”

Looking into the future

Do first movers enjoy a competitive advantage in the hedge fund sector? Will the adoption of innovative technologies deliver a ‘killer advantage’ to those who move ahead of the competition? Will managers be completely replaced by machines and robots? “I think most of these technologies – particularly AI and robotics – will find niche applications and we will start to see more and more programming start to displace human capital, particularly in trading and execution,” noted one interviewee. “But I’m not sure that robots will completely take over the firm.”


1 Business Insider, August 17, 2016 “This is the biggest trend in the hedge fund world right now”

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