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Non-Humans Beat High-Priced Fund Managers


BOSTON ( TheStreet) -- What's the best way to excise emotions -- fear, greed -- when choosing to buy or sell stocks or other securities? For starters, get rid of humans and let computers take over.

That type of investing, used by so-called quantitative hedge funds, received a black eye after Goldman Sachs (GS) said it was shuttering its once-esteemed Global Alpha quantitative hedge fund for poor performance.

Ever since, investors have been wondering if the computer-driven stock-picking model can't hack it in the wildly volatile stock market of late. But there's no evidence of that, as quantitative funds' average 0.64% return this year through August has outperformed the S&P 500 Index of the largest U.S. stocks, which is down 2.9%.

Quant funds can invest in a wide range of securitities or commodities, but they're typically rapid-fire traders. They tend to do well in the small-cap sector; hence their assets under management remain relatively small.

Quantitative hedge funds held about $560 billion in assets at the end of the second quarter, an increase of $52 billion since the start of the year, with inflows making up about $29 billion of that, according to Hedge Fund Research.

Joe Mezrich, head of quantitative research at Nomura Securities, said "quants are actually doing better than fundamental investors. There is a perception that quants have lost it, but it's actually not true. The returns are decent."

The Goldman Sachs situation, which includes the winding down of the once $12 billion Global Alpha fund, coincident with the so-called retirement of the head of the firm's quantitative strategies group, may have prompted that perception. "I would say the Goldman episode is an isolated example" unique to that firm, said Mezrich.

An example of a successful "quant shop" is TFS Capital of West Chester, Pa. It has built a series of proprietary quantitative models designed to exploit market inefficiencies and uses them to manage two mutual funds and two hedge funds.

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