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Alternative Market Briefing

Investors, hedge funds will run into challenges with machine-learning technologies

Thursday, December 15, 2016

Komfie Manalo, Opalesque Asia:

Computer-driven investing and machine-learning technology are becoming more and more popular in the hedge fund world.

But Richard Warfield of OTS Capital Management, a value-oriented long-short equity hedge fund, said that these technologies have one distinct disadvantage: They are not very good at telling why they make decisions, and Warfield believes this is going to be a major issue at some point.

"Now, obviously the quant trend is partly driven by new technologies around machine learning," Warfield said during the latest Opalesque 2016 Hong Kong Roundtable. "If a fund is down, particularly if it’s down significantly or for longer periods, investors want to know ex post why the fund is down, why a decision was made, and why you expect performance to turn around, or otherwise the inclination is to redeem. It can be very difficult to give a convincing explanation if you are dealing with some of these technologies."

Pitfalls with data-driven investments

Manoj Narang, who is launching a new $1bn hedge fund MANA Partners, said that while the hedge fund world is very excited with computer-driven investing and quantitative strategies that use computers to study data and make decisions, ......................

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