
At Blackrock, machines are rising over managers to pick stocks - Futurebot
https://www.nytimes.com/2017/03/28/business/dealbook/blackrock-actively-managed-funds-computer-models.html
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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?

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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.

~~~
simo7
Exactly, how can algorithm investing be truly passive investing?

There's a lot of confusion in the article.

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dsr_
Disclosure: I work for a company which does this stuff. I'm not in the
financial programming side.

There are several things you can do.

For example, say you wanted to hold the S&P500, but as individual stocks
rather than paying someone at a mutual fund or ETF to hold it for you. This
might be beneficial in a number of ways, but it has the serious drawback of
having to manage 500 entries. You might already own a dozen or two of those
entries already, or you have overlapping purchases in other investments.

You could tell a smart portfolio management program to use the S&P500 list as
a target, and tell it about all the rest of your current holdings. Then it
could analyze your current portfolio each day and make recommendations about
how to get closer to your target, while avoiding wash sales and duplicate
purchases. If you trusted that program, you could feed the output to your
brokerage and have the trades executed automatically. Or you could look at the
output and make decisions about whether you want to make the changes. Either
way, you are no longer doing analysis yourself, and you're edging closer to
your target, at which point you would be passive.

On the other hand, suppose you wanted an approximation of the S&P500 -- a
target that would give you most of the same exposure and opportunity, but had
a reduced number of individual stocks. You could run simulations on subsets of
the S&P500 until you got a group that performed sufficiently similarly to the
whole thing - 300? 250? 100? 50? as you reduce the set size you reduce the
fidelity of the model - and then buy and hold those.

You can do a lot with an algorithm, and if your strategy doesn't need to
operate in realtime, it will certainly look passive compared to HFT bots. A
human might not want to rebalance more than annually or quarterly, because it
can be a lot of work -- but a robot has no problems doing all the calculations
daily and looking for a sufficient reward to present to you.

~~~
simo7
Thanks for the explanation, there are 2 things I don't quite understand
though.

What is the advantage of building a replica of the S&P500 with individual
stocks rather than having it done with an index fund? Isn't the second option
much cheaper?

Secondly, isn't finding a subset of the S&P500 and trying to replicate it
still an active strategy?

~~~
dsr_
I expect that there are tax advantages to holding individual stocks rather
than an index fund.

Is finding a subset an active strategy? Depends. Do you do it every day, or do
you figure out your subset and then buy and hold for fifteen years?

Is it passive when you rebalance against your target quarterly?

I think we can all agree that it's not passive when you are doing HFT, and
anything which involves picking new stocks daily or weekly is active -- but
having an algorithm do the rebalancing against your existing target daily and
executing when a threshold is met? You're not making new picks, just
readjusting against what you've already picked.

~~~
loeg
> I expect that there are tax advantages to holding individual stocks rather
> than an index fund.

None that I am aware of. Mutual funds can force capital gains realization, but
ETFs do not.[0]

IMO there's no reason to roll your own index fund when you can just buy an ETF
with a very low expense rate. If you have enough money that rolling your own
(costs a fair amount to manage) is cheaper than the public fee, you might be
eligible for a special shareclass rate anyway.

[0]:
[http://www.investopedia.com/articles/investing/090215/compar...](http://www.investopedia.com/articles/investing/090215/comparing-
etfs-vs-mutual-funds-tax-efficiency.asp)

~~~
wahnfrieden
Here's one: as a US citizen living in Canada, I'm unable to invest in ETFs in
Canada (e.g. Vanguard Canada's S&P500) without suffering punitive taxes and
onerous reporting to the IRS. If it's an active investment, then it's fine,
it's taxed as normal.

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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.

~~~
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.

~~~
mason55
He's in Nevada actually

[https://www.fnlondon.com/articles/nevada-pension-fund-
manage...](https://www.fnlondon.com/articles/nevada-pension-fund-manager-does-
nothing-all-day-20161020)

~~~
Beltiras
Hah! That's why I couldn't find it! Could have sworn it was about CALPERS.
Thanks! It was in some other publication thou (if my memory isn't Swiss
Cheese).

~~~
mason55
Yeah there were a few articles about it. The first one I found when googling
just now was WSJ but that's fully pay-walled at this point

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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](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.

~~~
semi-extrinsic
If I understand Julia correctly, "Numpy" is built into the core language -
i.e. the basic Julia array class is fast like Numpy arrays and does what they
do.

As for equivalents to Pandas, Matplotlib etc., Julia has thin wrappers around
the Python versions of these so you can use them just like in Python with the
same performance.

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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.

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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.

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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...](https://web-
beta.archive.org/web/20140220072141/http://www.rattraders.com:80/methodology)

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

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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

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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.

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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?

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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.

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ww520
Does the machine just run a random generator to pick the stock?

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

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tonyedgecombe
No change then :)

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WalterBright
Hey, it's how I pick stocks!

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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.

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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.

~~~
nickpsecurity
Thank you. I wssn't clear on it.

