Inner workings of hedge funds

Currently, 70% of leaders of the industry with assets under management worth more than 350 billion USD are algorithmic hedge funds. Abilities of computers to process enormous amounts of data with fantastic speed result in a situation where portfolio managers just can't compete with them.

There is an opinion that a professional manager may effectively control a portfolio consisting of 30-40 stocks, but algorithmic models prove to be more efficient. It goes without saying that each manager has their own approach and system, analyzes data and makes decisions based on fundamental indicators, assesses financial instrument dynamics from the point of view of technical analysis, keeps in touch with representatives of an issuing company, and checks public information.

An algorithm, which is preprogrammed in computers of a fund, does the same, but in larger volumes and at higher speeds. Software can process any references to some particular company in mass media, social networks, and documents as well as process audio data – some hedge funds have their own speech recognition systems. For instance, it is well known that the fund called Two Sigma scans and analyzes informational flows in 70 different languages.

Apart from this, algorithmic hedge funds have an opportunity to assess clients' activity using satellite images. Advanced and up-to-date technologies allow to take almost any company to pieces to learn all necessary information. The system operates 24/7 in all corners of the world, analyzes everything that was said and written, and uses this data to generate new trading strategies. Of course, talented managers may beat hedge funds in expertise, but they are just physically unable to process the same amount of information.

As for a secret of success, it lies in the fact that the software assesses every stock by several parameters: fundamental, technical, event-related, and Alpha Capture, unique models of the company. The system evaluates market assets and then offers the highest-rated (according to its evaluation results) of them to a manager. Thanks to this approach, algorithmic hedge funds are able to maintain high level of profitability. In other words, hedge funds don't care about the direction markets are moving at some particular time, the dynamics itself is what counts. Decline of one particular stock or market segment is often counterbalanced by growth of some other assets.