20 Pages Posted: 22 May 2019 Last revised: 24 Jun 2019

Date Written: May 19, 2017

Abstract

We analyse and contrast the performance of discretionary and systematic hedge funds. Systematic funds use strategies that are rules-based, with little or no daily intervention by humans. In our experience, some large allocators shy away from systematic hedge funds altogether. A possible explanation for this is what the psychology literature calls “algorithm aversion”. However, we find no empirical basis for such an aversion. For the period 1996-2014, systematic and discretionary manager performance is similar, after adjusting for volatility and factor exposures, i.e., in terms of their appraisal ratio. It is sometimes claimed that systematic funds’ returns have a greater exposure to well-known risk factors. We find, however, that for discretionary funds (in the aggregate) more of the average return and the volatility of returns can be explained by risk factors.