From FT:

Systematic trading may inherently be guided by the same considerations. But this approach goes about investing in an automated way, based on intricate algorithms based on years of historical performance that restrict input of sentiment and hunches. Computers monitor and interpret market trends. They ignore theories, only concerned with how markets are moving. And they make investment decisions based on short, medium, and longer term time horizons. “I don’t believe in efficient markets,” says Rob Friedl, co-founder of Wisconsin-based Fall River Capital, with more than $200m in assets under management. “Markets reflect human nature, and human nature is often wrong.” He trades across seven distinct markets: agriculture, metals, energy, stock indices, short rates, bonds, and currencies. This gives him access to more than 80 specific trades, ranging from unleaded fuel, wheat and zinc to UK gilts, Euribor rates and the Hang Seng index. And because he can bet them either long or short, Mr Friedl has the potential to perform well in any kind of market. “No one time is any more challenging than another - so long as markets trend,” he says. Mr Friendl does not care if Opec is cutting oil production or who wins an election. His transactions are focused exclusively on when the price of a commodity, currency, or an index breaks out of a trading range. He will be long if it is going up, short if it is heading lower. And when the trend breaks down, he will get out of the trade. Since inception in August 2000, his fund has generated annualised returns of 16.17 per cent. In contrast, the S&P 500 was down 3.08 percent over the same period. Roy Niederhoffer refines the systematic approach, using ultra-short trades to profit from volatility. Last year the R.G. Niederhoffer Capital Management Diversified Program, with $560m in assets, was up 51 per cent. Since inception in 1993, his average annualised return is 11.1 per cent. But the historically strong trends of this year’s first and second quarter has revealed the one scenario in which he cannot excel. Year-to-date, as of June, he is down 1.19 per cent. Like Mr Friedl, Mr Niederhoffer ignores company fundamentals and macro-economic trends. With a background in neuroscience he has created computer models that focus on short-term investment biases hard-wired into the human mind. He explains: “Investors overemphasise recent experience when making decisions; people hate to lose more than they love to win; investors become more predictable as markets become more volatile; and when they are emotional, investors tend to be herd-like in behaviour. That last tendency leads to selling when stocks are near a bottom, and buying when rallies are overextended.” Mr Niederhoffer endeavours to capitalise on the predictability of these response patterns by targeting quick gains. His Diversified Program makes thousands of trades a year, ranging in duration from several hours to a week, and occasionally longer. Being right just a little more than half the time is all he needs to generate large profits.

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