At Blackrock, machines are rising over managers to pick stocks

[terravion]

It is interesting, but not all that surprising that ineffective management strategies are slowly being flushed out of the market. That human stock picking is pretty bad, is widely known, sorry for the pickers, but I'm sure there are other things that they can do to actually create instead of destroy value--reallocating their labor is a huge benefit for society.

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?

[Analemma_]

There's been a lot of interest lately in the hypothesis that increased passive investing might cause non-competition as mutual funds hold shares in every company in a sector. It's now gotten a couple studies from both academia and even the Federal Reserve, and so far the evidence is that there is nothing to worry about yet. Check out Matt Levine's daily column and the "Should index funds be illegal?" section, he's been following these developments.

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.

[tormeh]

Following a market cap index investing - the most popular method of passive investing - means buying a set of stock weighted by market cap and then mostly doing nothing. It's hardly the machines taking over. Algorithm investment is probably not passive investment.

[frgtpsswrdlame]

>With all these people passively investing, are we going to see reduced competition within industries...

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.

[prostoalex]

Social aspect of this are also interesting. We use the stock ticker as a reward and punishment for the companies involved, so introducing a new product that sells in unexpectedly large quantities generally leads to the stock price going up, while any bad news, e.g. pollution, poisoning, product recall, illegal behavior by the exec generally lead to a sell-off.

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.

[blazespin]

Computer stock pickers look at balance sheets, p/l statements, etc. if anything the markets will become more rational and less prone to bubbles.

[Danylon]

It's not a case of exclusive or. Gather a list of a 100 or so human stock pickers. Train a model to predict the effect of following their suggestions (buy, hold, sell) to both identify which experts are most right, and which particular experts do well for particular kinds of stocks. This model will do better than random guessing, and quite likely, better than any individual stock picker.

[tim333]

It's not so much machines getting better. It's investors switching to low cost passive funds rather than giving 2% a year to pay for the managers next vacation home.

[inputcoffee]

Exactly. These algorithms are not "picking" stocks so much as tracking stocks.

This is a story about investor behavior.

[Beltiras]

Reminds me of the story of the manager of CALPERS (California's public workers pension fund). Can't find the article but it focused on how hard work it is for a moneymanager to do nothing. CALPERS is showing good return for it's inactivity.

[one-more-minute]

Interesting to note that BlackRock's Aladdin software platform, powering much of this stuff, is being largely written / re-written in Julia.

https://juliacomputing.com/case-studies/blackrock.html

[daveguy]

Does Julia have good substitutes for Numpy / Scipy / sk-learn / Pandas / Matplotlib / Keras / Tensorflow / Theano yet either natively (for Numpy) or from libraries (for others)? Ease of analysis being almost at the level of matlab is why I stick with python. I would love to be able to switch to something that doesn't have such a heavy handed approach at the top.

[eb0la]

Not surprising.

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.

[tnecniv]

Any idea what it was written in before?

[jwilliams]

This is for mutual funds, which are ultimately intended to operate under given parameters -- balancing a cocktail of risk, reward, timeframe etc. Seems natural that you'd eventually move to algorithms for this, particularly as information asymmetry drops or is negated by other factors.

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.

[jgalt212]

Not to be skeptical, but Blackrock was never known as a stock picker's shop, it's a fixed income shop. The equities side has largely been a function of their indexed ETF biz.

If Fidelity or TR Price were going all in machine based stock picking, then this would be news.

[retox]

Reminds me of this art project by Michael Marcovici where they 'taught' rats to trade. Sadly no longer online. https://web-beta.archive.org/web/20140220072141/http://www.r...

[goldenkey]

That was bizzare but interesting. Looking for more on it now. Thanks for sharing.

[StClaire]

Hopefully, we can eventually cut down on fees with those mutual funds too.

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

[blueyes]

BlackRock isn't a whole lot more advanced than many other asset managers. So sure, Wall St. uses algorithms to trade, but that's not really news...

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.

[bertlequant]

It will be interesting to see what happens when machines and algorithms really start coming for jobs on that level. I wonder if far down the line, will there be one sole human at the top of all of this automation, protected from its outcomes?

[TheRealPomax]

So... wait, this is what investment banks have been doing for literally over a decade, is this news? For legal accountability someone has to sign off on the orders but that's about it. The computers have been picking stocks for years.

[ekianjo]

exactly what i was thinking. does not seem remotely new.

[ww520]

Does the machine just run a random generator to pick the stock?

[WalterBright]

There's a back room with monkeys throwing darts somewhere :-)

[mrich]

I wonder how much of this trend is helped by the stock market going mostly up and sideways in the past years. In that case passive investing is very good, you need to minimize fees. Timing the exit before the bubble bursts again and re-entering at the right time will be a big part of the long-term performance and I expect many humans to outdo the robotic overlords who will just stay invested.

[nickpsecurity]

Hasn't the Aladdin system been doing this for a long, long time? Or was it actually semi-automated?

[AznHisoka]

Aladdin simply provided portfolio managers with data. it did not pick stocks. the onus was on the portfolio managers to pick the best stocks given that data.