Hedge funds embrace machine learning—up to a point

ARTIFICIAL intelligence (AI) has already changed some activities, including parts of finance like fraud prevention, but not yet fund management and stock-picking. That seems odd: machine learning, a subset of AI that excels at finding patterns and making predictions using reams of data, looks like an ideal tool for the business. Yet well-established “quant” hedge funds in London or New York are often sniffy about its potential. In San Francisco, however, where machine learning is so much part of the furniture the term features unexplained on roadside billboards, a cluster of upstart hedge funds has sprung up in order to exploit these techniques.

These new hedgies are modest enough to concede some of their competitors’ points. Babak Hodjat, co-founder of Sentient Technologies, an AI startup with a hedge-fund arm, says that, left to their own devices, machine-learning techniques are prone to “overfit”, ie, to finding peculiar patterns in the specific data they are trained on that…Continue reading

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Hedge fund Tudor shuts one portfolio; Jones to play bigger role

BOSTON (Reuters) – Paul Tudor Jones, one of Wall Street’s most prominent investors, is restructuring his Tudor Investment Corp. by liquidating one portfolio and planning to play a bigger role in managing money at the hedge fund firm he founded nearly four decades ago.

FILE PHOTO – Paul Tudor Jones, founder and chief investment officer of Tudor Investment Corporation, speaks at the Sohn Investment Conference in New York, May 5, 2014. REUTERS/Eduardo Munoz

Jones told investors he was shuttering the five-year-old Tudor Discretionary Macro funds and that Andrew Bound and Aadarsh Malde, the portfolio’s co-chief investment officers, would be leaving.

The portfolio returned an average 3.5 percent a year during its lifetime, far below the average 17 percent a year return of the firm’s 31-year old flagship Tudor BVI Global Funds.

“It has been a frustrating several years for macro trading and for me especially,” the 63-year old billionaire wrote to investors in a Nov. 30 letter seen by Reuters on Friday. “But I believe the environment is on the verge of a significant change.”

Jones’ decision to shutter the portfolio was first reported by Bloomberg.

The move comes as some prominent hedge funds have struggled in the face of poor returns and investor redemptions. On Thursday, Neil Chriss announced plans to shut Hutchin Hill Capital and earlier in the year Eric Mindich closed Eton Park.

Clients who had money with the Tudor Discretionary Macro (TDM) Funds will be allowed to shift it into the Tudor BVI Global Funds. Jones, who started his career trading cotton futures, was not involved directly in investing money at the TDM funds but has always played a key role in managing assets at the BVI portfolio.

Now he will play an even bigger role at the $ 7 billion firm. “I will be the largest risk taker,” Jones wrote adding, “this means that my results will have a one-for-one performance impact on Tudor BVI. I relish this challenge.”

And after several difficult years, Jones said he expects the investing environment to turn around for people like himself who can make money when markets rise and fall.

Jones wrote that 2017, when stock markets have been breaching new milestones with regularity, reminds him of 1999 when markets were also surging. “The termination of that bull market kicked off a three-year macro feast,” Jones wrote, adding “The plot is much the same today but we can substitute Bitcoin and fine art for the Nasdaq 100 of 1999.”

Editing by Bernadette Baum

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The 20 percent club: hedge fund stars of an industry rebound

NEW YORK (Reuters) – A group of prominent hedge funds have roared back with market-trouncing returns in 2017, helping the industry score its best performance in at least four years in a surprise rebound for an often maligned pocket of Wall Street.

FILE PHOTO: Larry Robbins, Founder, Portfolio Manager and CEO, Glenview Capital Management LLC., speaks at the Sohn Investment Conference in New York City, U.S. on May 4, 2016. REUTERS/Brendan McDermid/File Photo

An elite club of managers rode bull markets and increased dispersion between securities to score profits of at least 20 percent through the end of October, a dramatic improvement from last year for investors such as Larry Robbins, Philippe Laffont and Chase Coleman, people familiar with individual funds’ performance said.

One of the largest returns came from Charlottesville-based investor Jaffray Woodriff, who used short-term stock bets to score a 68.3 percent gain in a key fund of his $ 4 billion Quantitative Investment Management.

By comparison, the S&P 500 Index was up 15 percent, more than double the benchmark HFRI hedge fund index, which was up 7.23 percent through October, its best annual return since at least 2013.

“We’ve been seeing significantly improved performance,” Darren Wolf, head of hedge fund solutions for the Americas at Aberdeen Asset Management, said.

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The last few years have been littered with hedge fund managers who charged steep fees and often promised heady returns only to lose money for investors or close shop entirely. A roaring stock market and the rise of low-cost investment tools, such as index funds, have also hit the industry.

Still, the mega winners this year offer some hope for investors and managers who believe the industry can produce “alpha,” or returns above the market’s “beta.”

The main fund managed by Robbins’ $ 11.7 billion Glenview Capital Management LLC is up 21 percent so far this year, thanks to positions in healthcare technology provider IQVIA Holdings Inc, health insurer Anthem Inc and chemical manufacturer FMC Corp, according to a public disclosure of top stock holdings and a person familiar with the returns. Like others, the person requested anonymity to discuss private information about the fund.

Robbins, a New York-based billionaire, lost money for investors in both 2015 and 2016, according to a report by HSBC Alternative Investment Group.

Coleman and Laffont relied on technology companies to drive outsized gains.

FILE PHOTO: Philippe Laffont, founder and portfolio manager of Coatue Management, speaks at the Sohn Investment Conference in New York, NY, U.S. on May 5, 2014. REUTERS/Eduardo Munoz/File Photo

The main fund managed by Coleman’s $ 20 billion Tiger Global Management LLC gained 34.5 percent through October, due partly to investments in Chinese internet companies Alibaba Group Holding Ltd and JD.com Inc, a second person familiar with his performance said.

The main fund in Laffont’s $ 12 billion Coatue Management LLC rose 29.3 percent, helped by positions in Facebook Inc and Shopify Inc, a third person said.

Coleman’s main hedge fund lost money in 2016, while Laffont’s produced a small positive return, according to media reports.

Other funds benefited from investments in emerging markets, people familiar with them said.

An Argentina-focused fund managed by $ 1.5 billion Bienville Capital Management gained 40.6 percent through October, while the oldest fund within $ 3.4 billion Toscafund Asset Management LLP gained 28.8 percent, helped by bets on financial companies in Portugal, Spain and Russia.

UNDER PRESSURE

The outperformers are still few though, and it is likely too early to tell if their successes signal a broad return to the bumper profits that made hedge funds famous, especially since the pressures facing the $ 3 trillion hedge fund industry remain.

A small but high-profile group of institutional investors have pulled out in recent years, and remaining clients continue to grouse about high fees and a lack of transparency into complicated bets.

Hedge funds usually charge 2 percent of assets under management and 20 percent of investment gains, though fees have fallen. Index funds cost just a fraction of a percent of assets.

Managers often justify tepid returns by saying they create a diversified portfolio that will hold up in a crash, making comparisons to generic stock and bond indices unfair.

If economic conditions sour and the bull market dissipates, as some are predicting, there could be a broader hedge fund comeback, said Arvin Soh, who helps pensions and other institutional clients invest in hedge funds for GAM Alternative Solutions.

“They are called hedge funds for a reason,” Soh told Reuters. “Things can’t go up forever, and that’s when we’d really expect these strategies to shine.”

Reporting by Lawrence Delevingne; Additional reporting by Svea Herbst in Boston; Editing by Lauren Tara LaCapra and Susan Thomas

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Nestle CEO praised by Third Point but hedge fund still wants more

LONDON/BOSTON (Reuters) – Nine months into leading the world’s biggest packaged food company, Nestle SA (NESN.S) Chief Executive Mark Schneider got a tentative thumbs-up from a prominent investor, who praised his early steps on Friday but said there was more work to be done.

FILE PHOTO: Nestle CEO Ulf Mark Schneider speaks during the Nestle shareholders meeting in Lausanne, Switzerland, April 6, 2017. REUTERS/Denis Balibouse

Billionaire hedge fund manager Daniel Loeb, whose firm Third Point made a $ 3.5 billion investment in Nestle in June, told his clients that he was pleased but not satisfied in a letter viewed by Reuters.

Loeb commended how the new CEO had shifted the tone, saying Schneider “has set a new course for Nestle” but “there is much more opportunity to unlock value.”

Nestle declined to comment.

The positive review suggested Schneider, a German who moved to Switzerland to become Nestle’s first external leader in nearly a century, was for now safe from an activist-inspired challenge. Such showdowns at large U.S. corporations have cost eight CEOs their jobs this year.

Third Point was especially complimentary about Schneider’s presentation at an investor seminar in London last month, saying it showed “a new approach of greater investor responsiveness.”

Loeb was at the meeting but kept a low profile, without asking questions of the CEO or answering journalists’ questions on the sidelines. However, there have been plenty of private conversations, with frequent phone calls between New York and Vevey, a person familiar with them said.

By staying in the background, for now, Loeb is giving Schneider time to steer Europe’s most valuable company through its weakest growth in more than two decades, as consumers ditch processed foods for fresher, healthier options.

That may not last forever. Loeb’s sharply worded letters to CEOs are legendary and he has agitated for ousters of leaders at companies such as Yahoo and Sotheby’s (BID.N). This year alone, CEOs at General Electric Co (GE.N), Pandora, Tiffany & Co (TIF.N), Buffalo Wild Wings Inc (BWLD.O) and CSX Corp (CSX.O) lost their jobs amid pressure from other activist investors.

Third Point spelled out its demands for Nestle months ago and reiterated them in Friday’s letter: specific margin targets, a faster pace of share buybacks, a reshaped portfolio and the sale of Nestle’s stake in cosmetics giant L‘Oreal (OREP.PA).

Schneider has delivered on some of those goals.

Nestle – home to Gerber baby food, Kit Kat bars and Nespresso coffee – set a margin target for the first time last month, following similar moves from rivals Unilever PLC (ULVR.L) and Danone SA (DANO.PA).

Nestle has also been buying back stock nearly every day since the September meeting as part of a $ 21 billion repurchase plan, and is selling its U.S. confectionery business and buying niche brand Blue Bottle.

On Third Point’s wish list is a sale of the 23 percent stake Nestle owns in French cosmetics company L‘Oreal.

When L‘Oreal’s heiress Liliane Bettencourt died last month, speculation mounted about the companies’ future relationship, which dates back 40 years.

Separately on Friday, L‘Oreal Chief Executive Officer Jean-Paul Agon said he foresaw no changes in the company’s shareholding in the near future.

Reporting by Martinne Geller in London and Svea Herbst-Bayliss in Boston; Editing by Lauren Tara LaCapra and Andrew Hay

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