Tech helps commodity funds outsmart market

By Barani Krishnan

NEW YORK (Reuters) - Artificial intelligence is helping trend-following commodity hedge funds triumph in treacherous markets when human brains alone aren't enough.

With industry data showing the average hedge fund down 20 percent or more this year due to strategies messed up by plunging commodity and stock prices, some in the game called Commodity Trading Advisors are up 50 percent or more.

But the trend-following CTAs say it isn't all their work: credit should also go to their computerized trading systems.

"It's like a computer playing chess against an excellent individual chess player," said Bernard Drury, president and chief executive at New Jersey's Drury Capital, a CTA relying entirely on systemic trading or trading without discretion.

"The computer can be counted on not to make human errors, not to make a miscalculation, not to be tired and not to have a bad day," said Drury, whose systemic flagship fund is up 57 percent on the year managing about $155 million (98 million pounds) in commodity and financial investments.

CTAs count themselves as part of the $1.7 trillion hedge fund industry, trading in a wide array of markets that include energy, metals, agriculture, financial futures, bonds, stock indexes and currencies. Like hedge funds, they have management fees of 2 percent and performance fees of 20 percent and strive for alpha, or performance beyond market expectations.

But while hedge funds operate with little transparency, investors in CTAs can see where their money is invested and work out profits and losses at the end of each trading day. Since CTA trades are mostly on exchanges, they are also known as the "managed futures" industry and are better regulated than hedge funds that often trade over-the-counter.

A Reuters poll of 12 managers that invest in a basket of hedge funds found October could be a horrific month for the industry, with seven of out of 14 strategies poised to lose money, as the global credit crisis worsened.