At Blackrock, machines are rising over managers to pick stocks
nytimes.com
nytimes.com
The real questions for me with this transition though are:
-With all these people passively investing, are we going to see reduced competition within industries because you don't have active, non-diversified, significant, institutional shareholders to drive aggressive competition against other industry participants? In fact, we may get the opposite where institutional shareholders don't want to see aggressive competitive moves because it is profit destroying for them on both sides (aggressor spends money to return less than the defender loses in profit--lose, lose for investor in both companies win, win for the consumers of this industry).
-How good is price setting if there are less and less actively managed funds? Are there new inefficiencies that are created by all this passive investing?
-Where aren't the machines taking over? Obviously, something like replicating an index is a great exercise for automation and programming. But truly maximizing return? Who is successfully, consistently beating the benchmarks with active strategies automated or not?
There's a lot of confusion in the article.
There are several things you can do.
For example, say you wanted to hold the S&P500, but as individual stocks rather than paying someone at a mutual fund or ETF to hold it for you. This might be beneficial in a number of ways, but it has the serious drawback of having to manage 500 entries. You might already own a dozen or two of those entries already, or you have overlapping purchases in other investments.
You could tell a smart portfolio management program to use the S&P500 list as a target, and tell it about all the rest of your current holdings. Then it could analyze your current portfolio each day and make recommendations about how to get closer to your target, while avoiding wash sales and duplicate purchases. If you trusted that program, you could feed the output to your brokerage and have the trades executed automatically. Or you could look at the output and make decisions about whether you want to make the changes. Either way, you are no longer doing analysis yourself, and you're edging closer to your target, at which point you would be passive.
On the other hand, suppose you wanted an approximation of the S&P500 -- a target that would give you most of the same exposure and opportunity, but had a reduced number of individual stocks. You could run simulations on subsets of the S&P500 until you got a group that performed sufficiently similarly to the whole thing - 300? 250? 100? 50? as you reduce the set size you reduce the fidelity of the model - and then buy and hold those.
You can do a lot with an algorithm, and if your strategy doesn't need to operate in realtime, it will certainly look passive compared to HFT bots. A human might not want to rebalance more than annually or quarterly, because it can be a lot of work -- but a robot has no problems doing all the calculations daily and looking for a sufficient reward to present to you.
What is the advantage of building a replica of the S&P500 with individual stocks rather than having it done with an index fund? Isn't the second option much cheaper?
Secondly, isn't finding a subset of the S&P500 and trying to replicate it still an active strategy?
Is finding a subset an active strategy? Depends. Do you do it every day, or do you figure out your subset and then buy and hold for fifteen years?
Is it passive when you rebalance against your target quarterly?
I think we can all agree that it's not passive when you are doing HFT, and anything which involves picking new stocks daily or weekly is active -- but having an algorithm do the rebalancing against your existing target daily and executing when a threshold is met? You're not making new picks, just readjusting against what you've already picked.
None that I am aware of. Mutual funds can force capital gains realization, but ETFs do not.[0]
IMO there's no reason to roll your own index fund when you can just buy an ETF with a very low expense rate. If you have enough money that rolling your own (costs a fair amount to manage) is cheaper than the public fee, you might be eligible for a special shareclass rate anyway.
[0]: http://www.investopedia.com/articles/investing/090215/compar...
Don't rebalance quarterly either. Index funds are long term, meaning years.
But... huge amounts of assets are held by people/companies that may have odd holdings (ultra concentrated positions) or odd needs (liability matching). Those people/companies may need algorithms to help them move their portfolio to an optimal portfolio with minimum cost.
I read an article a while back, wish I could find it. It was about how CEO compensation is often tied to absolute performance as opposed to performance relative to the whole industry and how passive management actually prefers this so I'd say yes.
>How good is price setting if there are less and less actively managed funds? Are there new inefficiencies that are created by all this passive investing?
Well Shiller PE is getting up there. I think this is super interesting because in our next correction or perhaps even now, as we move to an increasing rate environment, we will get to see some analytical minds actually beating the market. It's gonna be interesting.
That doesn't necessarily mean it won't be a problem in the future. Right now the big index funds like Vanguard and BlackRock own something like 10% of public shares. If they reach, say, 50%, we might have to revisit this, but for now, it seems to be a non-issue.
In an index-centric world if neither of the events cause the company to leave the index, I wonder if we'll still see such price adjustments.
On the hedge fund site extreme churn is fairly typical and considered part of the job. Well-known pickers (known mainly due to their windfall successes of the past and survivor bias) like Stephen Cohen, Carl Icahn and John Paulson are motivated less by the need to live paycheck to paycheck and more by the gambler's high.
If it's so easy why not to identify directly which stocks to invest in?
If you can predict which investors will perform well, then just try to predict which stocks will perform well directly.
It is not easy. Both to set-up, and the problem itself (you won't get a very high accuracy, but you will get much better than random guessing).
> If you can predict which investors will perform well, then just try to predict which stocks will perform well directly.
This won't work, because you don't have access to all the information that the stock pickers have access to, just their advice, and some features about the stock / the company the stock pickers work for.
But really, this is the bare basic of forecasting. It is somewhat annoying to have to regurgitate all of this: Like non-leaking forecasting is impossible somehow. It would be a better discussion if everyone just assumes proper forecasting practices. Instead people seem to assume I have no clue what I am doing, discarding my technique, because I did not mention removing duplicates, scaling, proper validation techniques, ... and a 100 other things, which are of no importance to the technique itself.
If fitting to human irrationality increases generalization performance, then it does not matter if the "machines seem destined to repeat our mistakes", it is still a useful signal. If fitting to human irrationality decreases generalization performance, your algorithm is overfit to noise (and you have bigger fish to fry than human irrationality).
Overfitting to noise is perfectly avoidable, not pre-destined when part of your data is noisy (noisy data is the rule not the exception).
This is a story about investor behavior.
https://www.fnlondon.com/articles/nevada-pension-fund-manage...
Meaning?
As for equivalents to Pandas, Matplotlib etc., Julia has thin wrappers around the Python versions of these so you can use them just like in Python with the same performance.
Just take any function you write and write code_native( your_function, () )
Knowing that the JIT is actually executing means a lot to me. For investment banks this means lower cost (quants can write code that goes into production) and lower latencies.
This is really now becoming a form arbitrage between the mega-funds on a sizable, but discrete, chunk of the trading market. Probably the same chunk that's already reserved for market-makers who can (usually) succeed through volume and brute force alone.
I think this is a good thing - arbitrage is a terrific leveller for the rest of us. It opens up the real market for us small fry.
If Fidelity or TR Price were going all in machine based stock picking, then this would be news.
You don't have to worry so much about algorithm engaging in insider trading or some other securities fraud. The auditors just have to look at the algorithm's data sources to verify the fund stays compliant with securities regulations.
Fewer costs (hopefully) mean fewer fees
Separately, BlackRock bought FutureAdvisor so that it could use machines to do the opposite of picking stocks; i.e. rebalance assets using index funds. A very different proposition.