Algorithmic pioneers outperform humans at scale

The track record and growth of Assets Under Management (AUM) of firms that spearheaded algorithmic trading has played a key role in generating investor interest and subsequent industry efforts to replicate their success. Systematic funds differ from HFT in that trades may be held significantly longer while seeking to exploit arbitrage opportunities as opposed to advantages from sheer speed.

Systematic strategies that mostly or exclusively rely on algorithmic decision-making were most famously introduced by mathematician James Simons who founded Renaissance Technologies in 1982 and built it into the premier quant firm. Its secretive Medallion Fund, which is closed to outsiders, has earned an estimated annualized return of 35% since 1982.

DE Shaw, Citadel, and Two Sigma, three of the most prominent quantitative hedge funds that use systematic strategies based on algorithms, rose to the all-time top-20 performers for the first time in 2017 in terms of total dollars earned for investors, after fees, and since inception.

DE Shaw, founded in 1988 with $47 billion AUM in 2018 joined the list at number 3. Citadel started in 1990 by Kenneth Griffin, manages $29 billion and ranks 5, and Two Sigma started only in 2001 by DE Shaw alumni John Overdeck and David Siegel, has grown from $8 billion AUM in 2011 to $52 billion in 2018. Bridgewater started in 1975 with over $150 billion AUM, continues to lead due to its Pure Alpha Fund that also incorporates systematic strategies.

Similarly, on the Institutional Investors 2017 Hedge Fund 100 list, five of the top six firms rely largely or completely on computers and trading algorithms to make investment decisions—and all of them have been growing their assets in an otherwise challenging environment. Several quantitatively-focused firms climbed several ranks and in some cases grew their assets by double-digit percentages. Number 2-ranked Applied Quantitative Research (AQR) grew its hedge fund assets 48% in 2017 to $69.7 billion and managed $187.6  billion firm-wide.

Among all hedge funds, ranked by compounded performance over the last three years, the quant-based funds run by Renaissance Technologies achieved ranks 6 and 24, Two Sigma rank 11, D.E. Shaw no 18 and 32, and Citadel ranks 30 and 37. Beyond the top performers, algorithmic strategies have worked well in the last several years. In the past five years, quant-focused hedge funds gained about 5.1% per year while the average hedge fund rose 4.3% per year in the same period.

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