Tuesday, May 30, 2006


The May 27 WSJ included "Funds That Are Managed by Computers".

"It's not surprising that technology plays a major role in running mutual funds. What is surprising is the decision-making power many fund managers give to computers.

"Stocks in so-called quantitive funds are bought, sold and analyzed according to the stony regimen of a computer. While humans program the machines to find stocks to meet certain investment criteria, searches are completed with speed and efficiency. 'Quant' managers then plug these electronic assessments into a portfolio and let the computer tell them which positions to trade and when."

The accompanying table showed the three-year annualized returns for four of the Quant funds. They ranged from 13.7% to 17.0%.

Over the same period, the Russel 2000 turned in 25.7% (three-year annualized) and the Fidelity Total Market Index fund hit 17.0% (three-year annualized).

Why bother? Computers (and their programmers) finally beat the world's best chess player. Yet, high-tech finance cannot beat efficient markets.