Man vs. Machine: Comparing Discretionary and Systematic Hedge Fund Performance

20 Pages Posted: 7 Dec 2016 Last revised: 19 May 2017

See all articles by Campbell R. Harvey

Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

Sandy Rattray

Man AHL

Andrew Sinclair

Realindex Investments

Otto Van Hemert

Man AHL

Date Written: May 19, 2017

Abstract

We analyse and contrast the performance of discretionary and systematic hedge funds. Systematic funds use strategies that are rules-based, with little or no daily intervention by humans. In our experience, some large allocators shy away from systematic hedge funds altogether. A possible explanation for this is what the psychology literature calls “algorithm aversion”. However, we find no empirical basis for such an aversion. For the period 1996-2014, systematic and discretionary manager performance is similar, after adjusting for volatility and factor exposures, i.e., in terms of their appraisal ratio. It is sometimes claimed that systematic funds’ returns have a greater exposure to well-known risk factors. We find, however, that for discretionary funds (in the aggregate) more of the average return and the volatility of returns can be explained by risk factors.

Keywords: Hedge Funds, Systematic Trading, Discretionary Trading, Alpha, Market Efficiency, Risk Factors, Asset Allocation, Algorithm Aversion

JEL Classification: E32, E44, G11, G12, G14

Suggested Citation

Harvey, Campbell R. and Rattray, Sandy and Sinclair, Andrew and van Hemert, Otto, Man vs. Machine: Comparing Discretionary and Systematic Hedge Fund Performance (May 19, 2017). Duke I&E Research Paper No. 2017-01. Available at SSRN: https://ssrn.com/abstract=2880641 or http://dx.doi.org/10.2139/ssrn.2880641

Campbell R. Harvey (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

Sandy Rattray

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

Andrew Sinclair

Realindex Investments ( email )

Level 2, Darling Park Tower 1
201 Sussex Street
Sydney, NSW 2000
Australia

Otto Van Hemert

Man AHL ( email )

Riverbank House
2 Swan Lane
London, EC4R 3AD
United Kingdom

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