The computers have won and Wall Street will never be the same

Ted Talk

Jim Simons

Institutional Investor just released its annual list of the top-earning hedge fund managers, and six of the top eight are quants, or managers who rely on computer programs to guide their investing.

The list includes Ken Griffin of Citadel, Jim Simons of Renaissance Technology, and John Overdeck and David Siegel of Two Sigma.

In 2002, in contrast, just two computer-driven investors were included in the ranking, according to Institutional Investor.

The list highlights just how hedge fund investing has changed over the past 15 years.

It is not that the brash, characterful traders of old are a dying breed. There are still plenty of alpha-male risk-takers in a company gilet wandering around New York and Greenwich, Connecticut.

It is just that they're losing ground to tech specialists who program robots to play air hockey in their spare time.

The rise of quant-driven hedge funds is really just a part of evolutionary shift that is taking place on Wall Street that encompasses both how investment decisions are made, and how they are put into action.

Simply put, technology is now a much bigger part of the investment process for many funds. They're using computing power to sift through reams of existing data - and finding new sources of data made possible by the proliferation of consumer technology like the iPhone - all to try and predict what the market might do, or the next set of data might reveal.

Their jobs pages are full of tech postings. Renaissance Technologies is looking for computer programmers, with no finance experience required. Two Sigma has roles in data science, machine learning, cloud computing and software engineering.

And don't forget, Bridgewater Associates, the biggest hedge fund in the world, now has a former Steve Jobs lieutenant as co-CEO, and wants to extend "the systematized decision-making" used in investing into management.

Renaissance Technologies

A Renaissance Technologies job posting

These funds also tend to execute their trades with a minimum of human involvement, a process that has become easier as many markets have moved to electronic platforms.

The vast majority of stock trading is now completed electronically. Tech driven high-frequency trader firms now dominate the US Treasury market. Goldman Sachs and JPMorgan have both describes themselves as technology companies.

That obviously means there is less need for the traders of old. Unsurprisingly, that has a lot of people worried.

At this point, though, I'm reminded of a great anecdote from Nathaniel Popper's recent profile of Goldman Sachs chief information officer Marty Chavez. Chavez has pushed hard for a focus on technology, even though it may lead to job cuts for those replaced by technology.

When faced with pushback from colleagues, Chavez was direct in his response, according to colleague Adam Korn.

"He basically said something to the effect of: 'If your job is a purely manual job and you are just clicking buttons, you should look to upgrade your skills set now."