Financial technology may soon outperform human asset managers

The head of a sizeable hedge fund believes that human asset managers may soon be replaced by new technology. Trading systems and computer modeling have always had a place in the world of finance, but not with the purpose of supplanting humans.

Are computers better at making investment decisions?

CNBC reported that Leda Braga, head of BlueTrend, a hedge fund with $8.9 billion of assets under management, argued systematic computer models may soon become more effective than human fund managers. Advances in algorithmic trading technology may one day challenge traditional investment approaches.

“Systematic computer models may soon become more effective than human fund managers.”

“Right now there is a place for both approaches,” said Braga, according to the news source. “That is the present. But then we have the future. Does the future hold a world where the systematic approach dominates? I suspect yes.”

Braga is a an engineer from Brazil who has excelled to become a leading hedge fund manager. She argued that traditional fund managers have not made substantial returns for their clients in the past year, while computer-driven hedge funds have fared better.

Are humans really doing it badly?

FT Advisor reported that in the beginning of 2014, investors worried interest rate increases would affect global markets negatively. However, last year, fixed income performed particularly well and investors made significant returns. Ben Bennett, credit strategist at Legal & General Investment Management, explained that in 2014, people expected higher interest rates and low total returns for the year. Interestingly, fixed income made decent returns and contributed to delays in the Fed raising rates.

“Everything actually shoved interest rates lower rather than higher, which led to very good returns for fixed income assets, outperforming equity markets,” said Bennett, according to the news source.

As witnessed last year, human asset managers did their jobs admirably, despite a myriad of macroeconomic factors that made the investment landscape challenging.

Would computer-driven systems have done better?

CNBC noted that human asset managers have the ability to interpret market conditions and understand the psychology behind investment decisions. However, the human mind is not capable of keeping track of the mass amounts of information that technology systems can. Braga explained where people fall short.

“In the case of our equities fund we trade 4,500 stocks. As a human being it would be very difficult to keep track of and control risks across that number of stocks,” said Braga.

Braga also indicated that as the regulatory environment calls on investment managers to be more transparent in their dealings, computer-driven systems can be beneficial. She noted, however, that computer-driven funds are less capable of dealing with large-scale central bank interventions in global markets and ultimately perform better making trades outside the consensus. BlueTrend bets that bond yields would fall last year, while most strategists believed that yields would go up.

Can computers make better investment decisions than humans?

“My colleague said at the time, ‘Only the fools and the trend followers are long fixed income in 2014.’ But it paid off,” said Braga, according to CNBC. “We were not long as a punt, but because we had analyzed the data. Because the systematic approach does this in an objective way, it means we can be contrarian.”

It may be a while until computers can fully replace experienced asset managers. Until then, trading systems and technology solutions will likely continue to have a key role in the financial industry – albeit not the main role.