Hedge Fund Uses Algae to Reap 21% Return

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Hedge fund manager Desmond Lun’s 21 percent average return over the last four years springs from an unlikely source -- a petri dish of algae.

Lun, 37, is a new kind of quant, combining AI wizardry with old-school biology to trade futures. Although his Taaffeite Capital Management is small, Lun makes a big claim: His research into one of the natural world’s most byzantine systems -- the biological cell -- has given him an edge in untangling the secrets of financial markets.

Computational biologists like Lun are late to the quant wave that’s upending hedge funds. Physicists and mathematicians were the first disruptors, who found that their statistical models, neural networks and machine-learning tools have had as many stumbles as triumphs. Now comes Lun, with artificial intelligence derived from algorithms he developed to figure out the mysteries of cells. The idea sounds more like a lofty dissertation topic than an investment strategy, except for one thing: Lun’s AI is beating the market.

Lun, who has a Ph.D. from the Massachusetts Institute of Technology, spent a decade developing models that decipher how genes interact and influence each other -- and published 18 academic papers related to predicting cellular behavior. Turns out, he says, that his models, tweaked for financial markets, are pretty good at figuring out how traded instruments like stocks and commodities interact and influence prices.

Lun’s machine-learning system hunts for what’s pushing prices of global indexes up or down. It examines tens of thousands of prices (called nodes in quant-speak) from thousands of securities, commodities and indexes. That means the algorithms potentially consider billions of interactions between pairs of nodes before making wagers. Two of its biggest bets as of June 30: long the FTSE 100 Index and short the MSCI Emerging Markets Index.

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