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

Campbell R. Harvey, Sandy Rattray, Andrew Sinclair and Otto Van Hemert
The Journal of Portfolio Management Summer 2017, 43 (4) 55-69; DOI: https://doi.org/10.3905/jpm.2017.43.4.055
Campbell R. Harvey
is a professor of finance at Duke University in Durham, NC, and an investment strategy advisor at Man Group in London, UK
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Sandy Rattray
is the CIO of Man Group and CEO of AHL in London, UK
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Andrew Sinclair
is a senior quantitative analyst at Realindex Investments, in Sydney, NSW, Australia
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Otto Van Hemert
is the head of commodities at AHL in London, UK
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Abstract

In this article, the authors analyze and contrast the performance of discretionary and systematic hedge funds. Systematic funds use rules-based strategies, with little or no daily intervention by humans. In the authors’ experience, some large allocators shy away from systematic hedge funds altogether. One possible explanation is what the psychology literature calls “algorithm aversion.” However, the authors 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 (that is, in terms of their appraisal ratio). It is sometimes claimed that systematic funds have a greater exposure to well-known risk factors. However, the authors find that for discretionary funds (in aggregate), more of the average return and the volatility of returns can be explained by risk factors.

TOPICS: Real assets/alternative investments/private equity, statistical methods, performance measurement, manager selection

  • © 2017 Institutional Investor, LLC
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The Journal of Portfolio Management: 43 (4)
The Journal of Portfolio Management
Vol. 43, Issue 4
Summer 2017
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Man vs. Machine: Comparing Discretionary and
Systematic Hedge Fund Performance
Campbell R. Harvey, Sandy Rattray, Andrew Sinclair, Otto Van Hemert
The Journal of Portfolio Management Jul 2017, 43 (4) 55-69; DOI: 10.3905/jpm.2017.43.4.055

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Man vs. Machine: Comparing Discretionary and
Systematic Hedge Fund Performance
Campbell R. Harvey, Sandy Rattray, Andrew Sinclair, Otto Van Hemert
The Journal of Portfolio Management Jul 2017, 43 (4) 55-69; DOI: 10.3905/jpm.2017.43.4.055
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  • Article
    • Abstract
    • CLASSIFICATION OF HEDGE FUNDS
    • RISK FACTORS
    • EMPIRICAL ANALYSIS: MACRO FUNDS
    • EMPIRICAL ANALYSIS: EQUITY FUNDS
    • DIVERSIFICATION POTENTIAL OF DIFFERENT HEDGE FUND STYLES
    • CONCLUSION
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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  • PDF

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