How Wall Street is being taken over by algorithmic trading

September 6, 2016 | Rocco Savage

This Forbes article points out how legendary trader’s like Paul Tudor Jones and leading hedge funds like Two Sigma and Renaissance Technologies are leading the charge when it comes to algorithmic trading.

Paul Tudor Jones helped define the rich hedge fund industry by placing big contrarian trades that made him a billionaire, like anticipating the 1987 stock market crash. But in 2001 he quietly made one of his best trades ever as the key investor backing the launch of a data-driven quantitative hedge fund called Two Sigma Investments. Jones knew one of Two Sigma’s co-founders, David Siegel, who had briefly worked for Jones’ Tudor Investment Corp. Tudor even provided the start-up space for Two Sigma at Manhattan’s One Liberty Plaza.

Today, Two Sigma is the fastest growing hedge fund on Wall Street. It manages some $35 billion and made its two founders, Siegel and John Overdeck, billionaires themselves. Quant funds like those managed by Two Sigma and Renaissance Technologies have been consistently posting solid returns in recent years while most other hedge fund strategies centered around the trading decisions of human beings have struggled mightily. The most successful hedge fund launch of recent years has been PDT Partners, the quantitative firm run by Pete Muller, a quantitative specialist who is well-respected by Jones. Last year, Siegel went to an investment conference and said, “eventually the time will come that no human investment manager will be able to beat the computer.”

This summer Jones has indicated that the era of complex math and computer-automated algorithms ruling Wall Street that he had a hand in launching is well on its way. The legendary macro-manager is laying off some 15% of the workforce at his $11 billion firm amid another stretch of poor returns and investor withdrawals. At Tudor, Jones has reportedly started a sweeping organizational change that will emphasize more technologically driven and big-data trading approaches.

“No man is better than a machine,” Jones told his remaining employees,according to a report in The Wall Street Journal. “And no machine is better than a man with a machine.”

With big banks like Goldman Sachs and Morgan Stanley limited by post-financial crisis regulation and their stocks struggling for the last two years, and major hedge funds suffering poor returns and redemptions, the quant funds seem like an island of dynamism and growth on Wall Street in 2016. Hedge funds are continually tapping Silicon Valley expertise to try to adapt to the revolution that is happening in asset management. Bridgewater Associates, the world’s biggest hedge fund, has added former Apple and Microsoft veterans to the top of its executive team. Former Google executives have landed at Two Sigma and BlackRock, the world’s biggest asset manager.

Even Steve Cohen, the billionaire hedge fund manager who put together one of the best track records the industry has ever seen, has started to get into the quantitative trading game. Earlier this year, Cohen said he was having trouble finding talented human traders to hire at his Point72 Asset Management. Then in July, Cohen committed as much as $250 million to Quantopian, an online trading platform which gives its 85,000 members the infrastructure to build algorithmic trading strategies. “The investment management business is all about talent and all about getting new sources of talent into this industry,” Matthew Granade, head of Point72 Ventures, said in an interview. These days the most coveted talent is more likely to have a computer engineering degree than an MBA.

Read the entire article at: The quants are taking over Wall St.

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