Beyond the Data: Hedge funds loving their algos more than ever before

Wesley Bray dives into the latest data from The TRADE’s research desk which saw the overall rating for algorithm performance reach the highest average score on record, demonstrating key improvements across the algorithmic trading landscape, particularly for hedge funds.

The past year has seen vast improvement across the algorithmic trading space when it came to hedge funds’ strategies, new data from The TRADE has found.

In fact, overall, 2024 has proved to be a banner year for algorithmic trading providers, with the overall rating for performance sitting at 5.86 – significantly higher than 2023 and demonstrating the highest survey average from hedge fund respondents since we began tracking their results separately in 2016.

The TRADE received a record number of responses to this year’s Algorithmic Trading Survey. In terms of geographic distribution, hedge fund respondents were based mainly in the UK (41%), Europe (31%) and North America (21%) with a handful of traders located in APAC (6%) and the rest of the world (1%).

Last year, The TRADE’s Algorithmic Trading Survey – Hedge Funds, saw a decline in scores across most key categories, however, this year category averages were up across the majority of functional service areas.

Ease of use (Figure 1) was the highest ranked category in this year’s survey, with a weighted average score of 6.08 out of 7. This was up from 5.89 in 2023 – which declined from 6.00 in 2022.

It is worth noting that survey respondents asserted that ease of use is the largest reason for using algorithms, and has been the main reason consistently in recent years.

High scores for ease of use prove the clear satisfaction among hedge funds utilising algo strategies, cementing the notion that desired developments within the technology are being met.

In second position, in terms of highest ranked categories, is anonymity with an average score of 6.07. This segment saw the largest annual shift, increasing by 38 basis points since last year.

This comes as no surprise as algorithmic trading frequently involves proprietary strategies that are developed with large investments in research and technology. Anonymity can help protect these strategies from being reverse-engineered or replicated by competitors.

Read more – Beyond the Data: Algo providers successfully address hedge funds’ cost concerns but execution performance is declining

On the opposite end of the spectrum, cost and dark pool access – which took the top spot in last year’s survey – were the only two functional service areas to record a decline in score year-on-year; showcasing areas for improvement and key focus areas for providers this year.

Algo monitoring capabilities and execution consulting were the lowest rated categories for 2024, despite both having increased in average score from last year. Algo monitoring capabilities and execution consulting both achieved scores of 5.61, which represented a drop of 30 and 12 basis points, respectively.

Elsewhere, on the asset management side, speaking to The TRADE earlier this year, Kendell James, multi-asset trader at Federated Hermes, labelled broker differentiation as the biggest roadblock when it comes to algo adoption.

“Algos are a great tool for equity execution, however, amongst the standard benchmarks and strategies such as VWAP, implementation shortfall (IS) or percentage of volume (POV), it can be a challenge to select the ‘optimal’ broker algo given the close similarities they all possess. For example, targeting percentage of market volume, a pretty straightforward and achievable strategy, doesn’t normally see much deviation per broker across the normal evaluation metrics,” he said.

Read more – Kendell James: The importance of algo selection in achieving best execution

Responses for The TRADE’s Execution Management Systems Survey 2024 are currently open. Buy-side users of execution management systems have until 12 July to comment on the services provided by their vendors. The survey is accessible here.

Current and previous surveys can be accessed here.