Neal Berger, the CIO of Eagle’s View Asset Management, thinks trend-following and other “pedestrian” quant strategies, such as momentum, won’t survive due to lack of dumb money. I have also been saying this for a few years.
According to Berger, the world is moving to a situation where “pedestrian” quant strategies like trend-following or factor investing won’t survive. Underpinned by decades of academic study, factors like value and momentum aim to take advantage of behavioral economics theories that say investors overlook cheap securities, or tend to bid up stocks that have gained in the past.
Systematic strategies require an endless supply of victims to thrive, and the growth of quant and passive funds has caused dumb money to behave unpredictably or disappear altogether.
Source: Bloomberg
Michael here. I have been saying similar things for a few years:
“Hedge funds’ problems are increasing as passive investing popularity is growing. There are no longer many retail counterparties to profit from. All this talk about quantitative models is hogwash in my opinion. These models cannot provide alpha to the tune of billions of dollars; they are useful only to retail quant traders with small accounts.”
Source: Price Action Lab Blog
and also more recently:
There are simply not enough counterparties willing to lose to trend-followers. The party is over, I think for good. Anyone looking at trend-following and momentum in general as factors is living in the past.
Source: Price Action Lab Blog
The next round of weak hands that will provide good profits to index funds are the naive AI funds that promote democratization of quantitative trading based on factors.
“Now every bank has a factor model,” said Benjamin Dunn, president of the portfolio consulting practice at Alpha Theory LLC, which works with managers overseeing about $200 billion. “You’ve had a democratization of a lot of data and analytics that were once the domain of very systematic quant investors. Everything is getting arbitraged away.”
Source: Bloomberg
Michael here: AI is more of an art than a science.
Without the edge of constructing features that are relevant and stable, machine learning will be the next trap that will transfer large wealth from the accounts of naive traders to those of market professionals.
Source: Price Action Lab Blog
See also this article about the perils of AI and machine learning.
We can expect some interesting developments in the next few years. I totally agree with Neal Berger that the alpha is in idiosyncratic methods that cannot be replicated by other market participants. I have a few at the institutional level I have been improving and monitoring the last few years.
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