Resumo

Human beings are narrow sighted. In the hedge fund industry, which in deeply dependent on precise decision making, human sentiment is prone to play a significant part in outcomes. Algorithmic trading in quantitative funds, which completely operate on programed decisions, contrast with regular human managed hedge fund practices. After all, in the Brazilian hedge fund industry, do humans stand a chance against algorithmic trading?

The goal of this study is to provide a performance comparison between quantitative hedge funds, in which managers program a strategy executed without human intervention, and traditional hedge funds, managed and operated by professionals aided by data analytics tools and software. Investigations within the subject has been developed with mixed results. The underlying doubt within this question has behavioral roots, as sentiment driven bias affect decision-making processes of traditional funds and could affect performance.

Human underlying bounded rationality and optimism could be hard-coded in the quantitative fund algorithm. However, feelings surfaced during crisis periods could act as and exogenous event capable of producing observable performance differences in man versus machine made decisions.

A diff-in-diff strategy is developed within panel data OLS regressions to assess the performance of quantitative hedge funds in crisis periods. Brazilian hedge fund database in provided by Economatica, within a 10-year span (from Jan/2011 to Aug/2020). Overall, final monthly database is comprised of 103,424 fund-period observations. To create a dummy variable for crisis periods, market index results (IBOV and IBRX 100) were considered. Alternatively, Baker and Wurgler's sentiment index was considered for robustness tests.

Results suggest strong and positive mean returns (+26%) of quantitative hedge funds during crisis periods when measured by risk-free returns. Measured by risk-adjusted returns (Alphas), quant funds have the overall upper hand (+47%). However, measured by risk-adjusted returns, there are no observable significant differences among regular and crisis periods, pointing to a positive overall risk-adjusted result. Results are robust to different market benchmarks and crisis identification strategies.

Empirical results show that quantitative hedge funds perform significantly better than regular hedge funds. Measured by risk-free returns, results are positive and significant during crisis periods and overall better measured by risk-adjusted returns.

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