Technical analysis refers to the study of past price action to predict future market moves. It makes use of charts, trading volume, and other statistical or mathematical indicators to gauge how the market might behave, based on the concept that the fundamentals of an asset are reflected in its historical price action.
While technical analysis is often seen as complementing fundamental analysis for both retail and institutional traders, many are still debating as to whether large investment firms or hedge funds actually make use of these tools. So do hedge funds use technical analysis? Well, maybe it depends on exactly what you mean by technical analysis. Here’s what a few well-known market technicians have to say.
Do Hedge Funds Use Technical Analysis?
Martin Schwartz, fondly known as “Buzzy” by trading enthusiasts, is a famous Wall Street trader who made a fortune trading stocks, futures and options. He is known for winning the U.S. Investing Championship in 1984 by bringing his $40,000 account all the way up to $20 million. He is a big advocate of moving averages and trading based on divergences, citing that he had used fundamental analysis primarily for nine years but made money when he shifted to technical trading.
Mark D. Cook, another winner of the U.S. Investing Championship, shares that his turnaround to success was his development of the Cumulative Tick Indicator. This is based on the number of NYSE stocks whose last trade was an uptick minus the number whose last trade was a downtick, thereby functioning as an indicator for an overbought or oversold market.
President and CEO of Alpha Financial Technologies Victor Sperandeo also credits technical analysis and proper risk management as crucial parts of his success. He has had a string of 18 profitable years at an average return of 72% using a life expectancy component to bullish or bearish moves, eventually creating the Diversified Trends Indicator, the Commodity Trends Indicator, and the Financial Trends Indicator.
Reviewing Forbes’ lists of richest investors also shows that market technicians have been able to score several spots. In 2012, James Simons or the “Quant King” made it to the 82nd spot with 11 billion USD in net worth. He is a mathematician and founder of Renaissance Technologies, which is a hedge fund that uses computer algorithms to analyse and trade securities. To be sure, Simons does not make trades based off of simple RSI readings, Elliot Wave or MACD signals but he is using a much more advanced for of quantitative analysis that could conceivably be referred to as technical analysis.
Not too far behind is Bridgewater Associates founder Ray Dalio who makes use of technical analysis to identify mispriced assets based on fundamental information. When it comes to making investment decisions, his fund employs well-defined systems and processes that are back-tested and stress-tested across different time periods.
Paul Tudor Jones
Paul Tudor Jones II, who created the Tudor Investment Corp in 1983 with just $300,000 under management, saw its assets rise to $12 billion by 2012 at an annual return of 24%. He is known for predicting the 1987 stock market crash based on his analysis of how derivatives were being used then. He is a swing trader, trend-follower, and makes use of Elliott Wave analysis, believing that price moves first and fundamentals come second.
Finally, David Harding of Winton Capital employs trend following methods and statistical modelling to trade futures and stocks and has been in operation since 1997, managing over $30 billion in assets. Winton uses the scientific method to develop advanced investment systems many of which are based on relatively simple concepts.
It is probably true that the golden years of technical analysis are behind us. The rise of technology means that many simple patterns have been arbitraged out of profitability. Therefore it’s no longer enough to look at a couple of indicators on a chart and hope to make money from your trades. That being said, it’s fair to say that advanced methods of technical analysis are still being used in the markets and traders with vast experience are able to prosper with simple methods of TA.
From these examples, it’s fair to say that there are hedge funds and investment firms that do use technical analysis at varying degrees, sticking to strategies that have proved profitable in the past and they continue to do so.