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

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.