Why machines have taken over investment management.
There is long, there is short, things either go up or down and you really have to wonder why it is all so complicated. Maybe therein lies the irony, that the more complex we made it, the more susceptible we were for the machines to take over. Fact is, that investment management has been a bloodbath for human decision making for decades.
Foremost, it was the so-called passive way of investing that inflicted much damage. When the benchmark became the index that anyone could buy for a few basis points, it made active management charging 1% as redundant as having a Blackberry. In the US, passive funds now make up close to 50% of all assets under management for equities, 30% for bonds, and the rest of the world is catching up fast.
Then there was algorithmic trading. The idea that we can program a machine to make decisions based upon a logical sequence of events has been making inroads into the investment community since the late ‘80s. The models were rather simple at first, but the advantage of being able to analyse and regress mountains of historical data in milliseconds made all the difference. By the mid ‘90s the war was over and more than 70% of all trading volume is now generated purely systematically.
Not satisfied with making thousands of investment managers redundant, the robots also developed automated advisors to engage with the clients directly. Gone were the days of relationship management, meetings, lunches, and building trust in your financial consultant. In came the robo-advisers, and they have been inflicting damage on IFAs, wealth managers and private bankers ever since. Globally, more than $1 trillion is now managed entirely devoid of any human interface and assets are expected to more than double over the next five years.
There is still a human resistance. So called macro-managers continue to defy the terrible onslaught of the merciless killer robots, with mixed success. There are also those that still think they can beat the market, but they are a dying breed, and the track record is quite dire. For most of us, there is little doubt that the machines are better at crunching numbers and making consistent investment decisions. Time to move on, and search for new opportunities. Surely, there must be a huge market for someone who can draw charts, compare price to earnings ratios, and talk a good story for a very large salary?