Can Technology Replace Fund Managers?

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If you're an aspiring hedge-fund manager, you may want to brush up on your computer skills: A professor at the Cass Business School in London says he's designed systems that would have outperformed flesh-and-blood managers 82 percent of the time over 15 years, and predicts such approaches are the way of the future.

According to Financial News, Professor Harry Kat and his colleague, doctoral student Helder Palaro, tested their systems-based futures-trading strategies against 2,500 funds of funds. They say their approach holds the same risk as normal funds. Kat contends that index fund management will account for nearly 40 percent of the hedge fund industry by 2016, putting it on-par with today's long-only management.

But his fighting words may be these: "In the early days, the high fees came on the back of 15 percent to 20 percent returns. Things are very different now; hedge fund returns are routinely around six percent to seven percent, basically the same as a glorified savings account. If fund managers are taken out of the picture, however, returns can be boosted by two percent or three percent."

Media reports say a program developed by Kat and Palaro, called FundCreator, is being used by a small number of institutions.

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