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Computer-powered hedge funds lag the bull market

Even as experts worry over the havoc AI could bring to financial markets, quantitative hedge fund strategies actually aren't outsmarting more human-reliant competitors in recent quarters, according to Bloomberg.

Quant fund managers — who feed huge caches of data to sophisticated, proprietary algorithms to find inefficiencies in the market they can exploit for profit — are struggling to keep pace with the broader market, and some funds, like the once-promising R&F Capital, are shuttering their doors altogether.

Why quants are struggling: Noted quant fund investor Neal Berger wrote in a letter to clients this summer that it comes down to two factors:

  • Increased competition: more investors are using algorithms to fight over the same inefficiencies in the market.
  • Low volatility: quantitative funds are most successful in an environment where there is large disagreements in the market over the prices of assets. Today there is little disagreement, and the best way to earn outsized returns is placed highly leveraged bets that the market will remain calm. That's working for some investors, but is far too risky for others.

So what explains low volatility? Market watchers have been scratching their heads for an explanation for low volatility even as traders have processed important unexpected events like Brexit and the election of Donald Trump. But one answer is the increasing popularity of index funds that allow individual investors to buy into a broad diversified set of stocks or other assets that reallocate automatically. Instead of individual investors duking it out with competing stock picks, many are choosing just to buy a small but broad slice of the market, and letting it ride.

What's next: Quants won't take their disappointing returns lying down. Major investors like Paul Tudor Jones are putting money behind investment strategies powered by artificial intelligence that aim to use ever larger data sets and more sophisticated algorithms to weed out profitable inefficiencies in the market.

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Source: McCabe gave interview, memos to Mueller

Special counsel Robert Mueller
Mueller after briefing members of Congress on Capitol Hill last year. Photo: Saul Loeb / AFP / Getty Images

Andrew McCabe, the former FBI deputy director who was fired Friday night, has met with special counsel Robert Mueller's team and has turned over memos detailing interactions with President Trump, according to a source familiar with the exchange.

  • McCabe's interview with Mueller's prosecutors apparently included what he knows about former FBI director James Comey's firing.

The bottom line: The memos include corroboration by McCabe of Comey's account of his own firing by Trump, according to the source.

Khorri Atkinson 20 hours ago
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Comey to Trump: America "will hear my story very soon"

Trump shakes hands with Comey at the White House last year. Photo: Andrew Harrer-Pool / Getty Images

Former FBI Director James Comey tweeted a pointed message to President Trump this afternoon after the firing of former FBI deputy director Andrew McCabe:

Between the lines: Comey's book comes out April 17.