Skip to main content

Does algorithmic trading work?

Well, we’re a tad biased on the topic, so let’s keep opinions out of it and look at some of the moves our algorithms have made in recent weeks.

Sitting out the bear market rally

There was a slight rally in the market at the end of May that many investing heavyweights bit into. Our algorithms, however, let it pass and held their defensive positions. This was because they accurately identified the rebound as a bear market rally. An awareness that’s put our algorithms ahead of their respective market benchmarks in recent days.

What is a bear market rally?

Though it sounds exciting and lively, the reality is likely better visualised by its alternative name: dead cat bounce. Which comes from the idea that even a dead cat, when it falls far and fast enough, will bounce. As graphic as that sounds, you can imagine it doesn’t do much. And that’s the gist of what’s happening in the market right now. A slight rebound looked more promising than it was, and some investors jumped on rising prices. The problem is that the rally was short-lived, and the market ended up falling further than before.

Since our algorithms reacted swiftly to market circumstances (that humans may refer to as a bear market rally) and held in defensive positions, they’re now weathering this heavier fall better than some other investors (including our benchmarks) who bought into the bounce.

Unhedged algorithm performance vs market benchmark

Unhedged algorithm performance during bear market rally

*Insert graphs are performance of algorithms against respective benchmarks from 01/01/22 to 21/06/22

Holding in defensive assets

Our Sector Rotation and Industrial Activity algorithms accurately read the market and identified the right time to invest in defensive assets.

A specific ETF that they bought into was FolioBeyond Rising Rates ETF (RISR). An ETF that seeks to provide protection against rising interest rates while generating current income against stable interest rates. Essentially, it’s built to profit from rising interest rates, and as we all know, those rates have only been going up.

The decision made by our algorithms to make defensive moves and invest in this ETF and others is one of the main reasons why these two algorithms are currently outperforming market benchmarks. The exciting part for our team is that we didn’t signal to the algorithms to invest in RISR specifically, the algorithms made that call all on their own.

Knowing when to sell

Sometimes the market goes haywire, and it may be that the best step forward is to sell. Yet, when that time comes, some investors could end up losing because traders wait too long to make a move. Possibly waiting for that gut feeling that tells them it’s the time to sell. Algorithms don’t have feelings (poor things), gut or otherwise, they just critically observe data points and make the best logical step for your investment. And they may be more likely to make those decisions at the right moment because, well, they never sleep.

Our third algorithm determined that moment was a couple of weeks ago. Momentum performed a full sell down and held in USD Cash. We didn’t tell it to make that move; it’s simply designed to identify and react to trends.

So, does algorithmic trading work?

In our opinion, yes, it does. And oftentimes faster than humans.[1] Though we like our human team members as well.

This is the exciting and unique difference about investing with Unhedged; we leave the heavy-lifting to the algorithms. The algorithms that never sleep, never holiday, and check millions of data points each and every day.

You can imagine we’ve all had our fan club pom poms out the last few weeks as we watched our algorithms make these moves. We designed them to do as much, but to see that logic demonstrated when the market is in turmoil is like having your kid bring home that A+ grade.

If you haven’t invested yet, or if you’re not sure where to begin, have a look at the app that puts algorithms to work for you. Take a nap, take a holiday, do whatever you wish; the algorithms will keep working whilst you’re away.