As soon as an investment strategy becomes too crowded, it begins to lose its edge. It is the lesson that never seems to sink in on Wall Street. There is always a reason why this time will be different. Quant funds and smart-beta ETFs are today’s example. Both have been sold as a panacea to replace investment managers. Who needs humans when you can run a couple of computer screens for low P/E stocks or high momentum shares?
Based on the fund flows into these strategies, this is apparently the thinking of many self-proclaimed investment advisors (self-proclaimed because, let’s get serious, do you really need to pay an advisor to pick a handful of ETFs?).
Here Bloomberg points out that the race to automate the investment management process has stumbled badly.
For computerized strategies that are supposed to be making people obsolete, quants are looking decidedly human in 2017.
Program-driven hedge funds are stumbling, a promising startup has closed, and once-reliable styles are showing weakening returns. A handful of investment factors, the wiring of smart-beta funds, have gone dormant.
This isn’t just normal volatility confined to a single month, according to Neal Berger, the founder and chief investment officer of Eagle’s View Asset Management, a $500 million fund-of-funds that invests with 30 managers, half of them quants. Returns have been decaying for a year, suggesting the rest of the market has figured out what the robots are doing and started taking evasive action, Berger said.
Read more here.