What Do Hedge Funds Think of Technical Analysis?


The general perception of technical analysis among the leading hedge funds in the world is that it is an important part of their trading functions. There is no conclusive evidence to support this point yet some experts have suggested that around 60% of the traders focus on employing technical factors when making decisions. It comes as no surprise that technical analysis is at the center of many hedge funds’ operations. However, you wouldn’t hear them announcing it publicly. Why is that, you might ask.

Well, there is the idea that if a hedge fund reveals that it uses technical analysis, it could impact their business in a negative way, and significantly at that. This is because most of the investors in hedge funds know the level of risk they are exposing their wealth to. Hence, learning that technical analysis is the way things are done might deter them from investing further, regardless of the results. So, since their clients don’t care much for technical analysis, most hedge funds don’t make it public should they use this strategy.

Over the years, the dynamics of running a hedge fund have changed significantly. Most companies are focused on following the prevailing trends in the market. In fact, a majority of algorithmic trading systems which are non-arbitrage keep a close eye on the trends and employ strategies to capitalize on them. In this regard, there is a growing trend among hedge funds and the overall financial services sector which professes the automation of the trading strategies, with the strategies themselves being highly complex and sophisticated.

Now, as you might know, deploying any complex trading strategy requires some degree of technical analysis. As a matter of fact, the strategies are based on the principles of technical analysis. These include banking on fundamentals when selecting traders to make and then using technical analysis to make the trades. This has become a guideline for the modern hedge fund trader.

Regardless of how the financial industry evolves, there are a large number of traders who still consider technical parameters the gospel by which they operate. For instance, they will always execute a buy if the 50-day moving average starts going bullish. The fact that the number of such traders runs into the hundreds of thousands, it would be sensible to pay heed to it. Come to think of it, even if 100,000 traders follow this rule, it could mean millions of shares are in their control.

Since the people are making their trading decisions based on technical analysis, they can influence others to follow their patterns. For instance, if a thousand traders invest in a security all at once, it is likely to bring about a wave of buying. So, the bottom-line is that since people believe in the value of technical analysis, hedge funds have to take it into account and then plan their strategies accordingly. Even if the hedge funds are averse to disclosing it, they do use technical analysis and there is no reason to believe they will stop using it in the near future.

One of the foremost reasons hedge funds haven’t given up on technical analysis is the fact that it enables them to capitalize on easy opportunities to boost their profits. Generally speaking, technical analysis is suited only to short-term trading, something hedge funds don’t indulge much in. But, there is no denying the fact that employing this strategy can enable to squeeze every possible dollar from any opportunities available in the short run in the market.

In conclusion, it is a confusing scenario as far as the relationship between hedge funds and technical analysis goes. There is no denying the fact that technical analysis is more popular among individual traders than hedge funds, but perhaps this is the reason why hedge funds haven’t given up on it completely and still continue to use it, albeit intermittently. It would be baffling for a hedge fund to even consider having technical analysis as the key component of their trading operations.

So, when it comes to the perception hedge funds have of technical analysis, it won’t be wrong to state that they view it as a necessary evil which they have no way to get rid of.