Recently I read an article about a Hedge fund that uses a computer algorithm...?

Question

This hedge fund is run by one of the highest paid people on Wall Street and is sometimes responsible for up to 10% of the daily trades that occur on NASDAQ. Does anyone know what I am talking about? I think i read about it in Wired. I am NOT talking about Long Term Capital Management (this computer driven fund actually works :)

Answer 1

Doesn't matter where you read it, the article was rubbish. Algorithms are widely used in fund management and the hedge fund industry. All standard hedge funds use one, and they will all tell you that their algorithm is the best one in the market.

There are hundreds of very clever people in London and New York working on these algorithms. They all think they have modelled every possible outcome, but soner or later they all lose money. If they're big enough they can come back and make a profit the next month, but the hedge fund industry is increasingly migrating to the big players. Goldman Sachs has an internal risk management system & has calculated that in the worst market conditions they could lose $100 million in a single trading day.

Also, if anyone tells you they're responsible for 10% of the trades on Nasdaq they're either lying or they are a crook. Most likely it was just a line & the journalist was stupid enough to include it in the article.

Answer 2

Hedge funds undoubtedly use computer algorithms, especially those with complex valuations formulas or to track the timing of trading.

I was reading a Wall Street Journal article today and they were talking about how some hedges are worried that some of the secretive practices might come out in the possible sale of access to the trading database of the bankrupt hedge Refco. The author Dugan said that the Citadel Group was interested (and for about $75,000 you can take a peek too), and that Citadel often did about 1 percent of the activity on exchanges in New York, London, and Tokyo. The ambition is to reproduce the algorithm for Refco's buy and sell triggers. Apparently, it did some things right.

Answer 3

All hedge funds use computer algorithms.

Nearly all hedge funds trade a small chance at a big loss for large chances at a series of small gains. Long-Term was extremely profitable -- until it wasn't. Just because this one seems to work now doesn't mean it will continue to work.