Investor’s Notebook
Investors seem to have very short memories. The worst-performing hedge funds during the global financial crisis were quantitative or algorithmic funds.
These funds can make a lot of money if markets follow predictable patterns, but when they do not, they do not have the benefit of human intervention to help them change patterns. SA will undoubtedly get quite a few of these algo funds. I can tell this because of the number of requests I have had to talk about HFT. At first I referred the PROs to our health writer until I was told it had nothing to do with hormones or therapy but stood for high-frequency trading. Now that the JSE has introduced a trading system which is 400 times faster than the old one, algo funds are more likely to spring up in SA. According to the 187 quant funds were started in 2011 and a similar number this year. Quant funds account for one out of eight hedge fund start-ups globally. Banks are shutting down proprietary trading desks: the obvious thing for these traders to do after leaving an investment bank is to set up a hedge fund business. Yet many of the established managers such as Man Group and Renaissance Technologies are struggling. Quant funds have lost 3,2% on average this year, while the broader universe of hedge funds has gained 4,5%. I think that if investment processes were foolproof, the General Electrics and Johnson & Johnsons of the world would have patented them and made a fortune for their shareholders.
It is said that generals are always ready for the last war, and similarly black boxes work perfectly in the old paradigm but are not suitable for coming market conditions. Instinctively, as a part-time share analyst, I put more faith in good investment ideas. After all it is people who got in on the ground floor with Pick n Pay, Remgro and Liberty that made the big bucks. Steve Cohen of SAC Capital, with an investment team of 120, has been known to charge an unheard-of 50% of upside. He made 68% (after fees) in 1999 on dot-com shares, and more in 2000 shorting them in the bust. He never seeks publicity, which adds to his air of enigmatic genius. Yet his reputation suffered a blow for what can only be called insider trading (though no doubt his lawyers will call it something else). It involved a colleague who found out that an Alzheimer’s trial was going badly. On this news, SAC avoided US$194m in losses and made $84m from trading in Elan and Wyeth, the pharmaceutical firms concerned. Cohen is the kind of manager who scares CEOs. Corporations will be thrilled to see his wings clipped.