End of Fund Managers: Machines are doing the stock picking

End of Fund Managers: Machines Are Rising Over Managers to Pick Stocks

The largest fund company in the world, BlackRock, has faced a thorny challenge since it acquired the exchange-traded-fund business from Barclays in 2009. These low cost, computer-driven funds have exploded in growth, leaving in the dust the stock pickers who had spurred an earlier expansion for the firm. The rise of passive investing — exchange-traded funds, index funds and the like — has revolutionized the investment world, providing Main Street investors with greater opportunities at lower fees while putting pressure on even Wall Street’s biggest money managers.

Now, after years of deliberations, Laurence D. Fink, a founder and chief executive of BlackRock, has cast his lot with the machines.On Tuesday, BlackRock laid out an ambitious plan to consolidate a large number of actively managed mutual funds with peers that rely more on algorithms and models to pick stocks.

The initiative is the most explicit action by a major fund management firm in reaction to the exodus of investors from actively managed stock funds to cheaper funds that track every variety of index and investment theme.

Some $30 billion in assets (about 11 percent of active equity funds) will be targeted, with $6 billion rebranded BlackRock Advantage funds. These funds focus on quantitative and other strategies that adopt a more rules-based approach to investing.

“The democratization of information has made it much harder for active management,” Mr Fink said in an interview. “We have to change the ecosystem — that means relying more on big data, artificial intelligence, factors and models within quant and traditional investment strategies.” Full story

The trend of AI replacing humans is in full play; any job that requires data analysis will be done much faster and more efficiently by machines. A host of careers will become obsolete in the years to come. A lot of the students studying to become engineers, doctors, lawyers, accountants; etc. will find that they will be competing against AI systems.

When it comes to Wall Street, however, AI will be a failure as AI cannot understand the mass mindset for the simple reason that most humans cannot or do not want to fathom this phenomenon. So these machines will be programmed to think like regular traders whose emotions do the talking. Therefore we can expect a lot of so-called flash crashes in the years to come; the higher the markets soar, the stronger these moves will be. At some point, 1000 point moves in the Dow will be a common occurrence.  We find the idea of bots playing the markets to be quite interesting and embrace it, for it will provide many opportunities to buy great stocks at a discount. The masses will follow the bots, the bots will follow the programmers that programmed them, who are part of the herd, and the ensuing chaos that follows will prove to be nothing but a splendid buying opportunity.

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