The Robots Win: Blackrock Bets On Computers Over Human Stock Pickers, Fires Dozens

Tyler Durden's picture

The writing had been on the wall - and countless online articles  - for a long time...

... and on Tuesday it finally hit the world's largest asset manager, where in the war between passive-investing robots and active-investing humans, the humans lost. As the WSJ reports, at Blackrock, the era of the star "stock picker" is coming to an end, and he will be replaced by this...

As part of a massive overhaul that has been hinted at in recent months, and was unviled on Tuesday, BlackRock announced a reorganization of its actively managed equities business that will include job losses, pricing changes and a greater emphasis on computer models that inform investments.

BlackRock's new strategy centers on a view that has been facilitated by the not so stealthy central bank takeover of capital markets in recent years, according to which it is difficult for human beings to beat the market with traditional bets on large U.S. stocks. As a result, at least seven stock portfolio managers are among several dozen employees who are expected to go as part of the revamp.

Instead of handing their funds to other humans for investing purposes, for the first time BlackRock’s Main Street customers will be able to buy lower-cost quantitative stock funds that rely on data and computer systems to make predictions, an investment option previously available only to large institutional investors. This option also virtually assures that the next market crash will be unlike anything ever seen. Some existing funds will merge, get new investment mandates or close.

For now the overhaul is only taking place at Blackrock, and represents the most dramatic attempt to rejuvenate a unit that has long lagged rivals in performance. Clients have pulled their money from the actively managed stock business in three of the past four years even as BlackRock’s total assets climbed to a record $5.1 trillion, according to the WSJ. BlackRock had $275.1 billion in active equity assets under management at the end of December, down from $317.3 billion three years earlier.

However, the world's biggest money manager is only the beginning. Many other firms that specialize in handpicking stocks are also struggling with low returns and shifting investor tastes. Since the 2008 financial crisis, clients across the money management industry have moved hundreds of billions of dollars to lower-cost funds that track indexes instead of promising to beat the market.

BlackRock has it better than most of its competitors in that it is solidly diversified, and has benefited from investors’ embrace of passively managed investments. The amount overseen by the entire firm has been bolstered by its exchange-traded fund business, which now comprises about a quarter of all assets under management. It also sells investment and risk-management technology, giving it a broader mix of businesses than many of its rivals.

It also won't be the first time BlackRock has tried to rediscover itself. As the WSJ reports:

The new effort to improve the performance of BlackRock’s stock-picking unit isn’t the first but goes further than past changes. In 2012 BlackRock replaced management teams of some of its largest stock funds and analyzed the investment process of each team.

 

Yet by the end of last year more than half of the assets in BlackRock’s traditional actively managed equity products underperformed their benchmarks or peers over one year, up from less than a quarter a year earlier. Over three years, 38% were underperforming, compared with 40% at the same time in 2015.

Who would have though that outperforming in centrally-planned markets that make no sense could be so difficult. Oh wait...

In any case, good luck to the man who is supposed to fix BlackRock's legacy problems. The author of the company’s new strategy is former Canada Pension Plan Investment Board CEO Mark Wiseman, who was hired last year to turn around the stock-picking business.

The effort is the first test for Mr. Wiseman, viewed by some company observers as a potential successor to Chief Executive Laurence Fink.
Mr. Wiseman—who spent his first six months examining the strengths and weaknesses of the business with staff, consultants and clients—said the firm is trying to “play offense” as smaller rivals struggle.

 

“We’re in really rough seas, but BlackRock is an aircraft carrier,” Mr. Wiseman said. “Everyone else is in dinghies, and they’re bailing like hell.”

Someone should tell Mr. Wiseman that aircraft carriers are also the easiest to spot, and sink, by enemy forces.

Under Wiseman’s plan, BlackRock will change the investment mandates of some funds and focus on a slightly smaller lineup of equity products that includes nine quantitative funds that will be available to retail investors. In some cases those funds come at roughly half the cost of those they replace.

 

The firm will also run country and sector-focused stock products where executives believe they can outperform, funds that pursue specific outcomes such as social impacts and riskier go-anywhere or funds that make more concentrated bets. The changes weed out actively managed stock funds that closely follow indexes.

At the end of the day, however, it is all about lowering prices in a world in which simply investing in the SPY has been the best trade ever since the central banks took over in 2009. Blackrock's planned price cuts involved in creating that lineup will result in a loss of $30 million in revenue annually, the firm said. The firm will take a $25 million charge in the first quarter to fund layoffs, staff relocations and research investments. San Francisco will become the firm’s hub for quantitative investing and some emerging-markets staff will move to Asia from London. Another change, Mr. Wiseman said, will be a better integration of research and data informing both traditional and quantitative stock picks.

What happens next? It's unclear: "executives acknowledge potential risks from the staffing and fund changes. Too much manager turnover at funds can spook customers and trigger withdrawals. And changing fund mandates can lead clients who want what they initially signed on for to head for the exits."

But the biggest question mark is what will be the outcome of reallocating virtually all AUM to a bunch of robots who have never traded through a rate hike cycle, and have never had to participate in the process of central bank balance sheet normalization. Sadly for them, there is no instruction manual on how to trade that particular scenario. Another problem: what happens when Blackrock's "smart beta" chasing robots start selling? Since the signal will likely be the same one that prompts all other robots at other funds to sell too, with all shorts obliterated, and with increasingly fewer humans left, who will be there to buy?

As for the humans who once made a killing in trading and are now obsolete thanks to a handful of 20-year-old math PhDs, there is always finance twitter to pass those long months (and years) of doing, well, nothing.

* * *

Sarcasm aside, the reason why BlackRock's decision - which will soon be adopted by most of its peers - is bad news for both the financial industry and capital markets, is because as we discussed last October, and urge all readers to skim one more time, "The Shift To Passive Investing Increases Systemic Risk, Will Make Crashes Worse."

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Smedley's picture

...and welcome to Skynet!

Mr Pink's picture

Computers will do everything better than humans. 40% unemployment by 2030. Don't say you weren't warned

JustPrintMoreDuh's picture

Luddites + EMPs = voila

 

 

TrollandDump's picture
TrollandDump (not verified) JustPrintMoreDuh Mar 28, 2017 6:21 PM

I'm curious if UFC will ever hire robots. To prance around almost naked between rounds. That will lower not only the wages, but...

Nevermind that, let's enjoy human nature while it lasts.

UFC Octagon star Lindsay Pelas has no Problem Rocking Topless all Over the Internet

http://dailywesterner.com/news/ufc-octagon-star-lindsay-pelas-has-no-pro...


bob_bichen's picture
bob_bichen (not verified) TrollandDump Mar 28, 2017 6:27 PM

dailywesterner,com  = SPAM - VIRUS - TROJANS !!

danger!!!   DO NOT VISIT THIS WEBSITE!  

Chronic spammer XYTHRAS has "reincarnated" in a Truth-in-Advertising new handle as "TrollAndDump."

 

Take a minute and write to abuse@zerohedge.com and ask that this SICK, SPAMMING FREAK SHOW of a TOXIC DUMPSTER FIRE who suffers from a serious case of SPAMMING COMPULSIVE BEHAVIOR and request that  "TrollAndDump" and "XYTHRAS" be permanently banned for chronic spamming.

John Law Lives's picture

Thanks for posting this.

I have written to abuse@zerohedge.com and asked that Xythras be banned.

Theosebes Goodfellow's picture

I wholeheartedly agree that when that cerash comes, the algos are going to be one of the big reasons it will be so horrendous. They in particular will be a big factor in the "perfect storm" of the mother of all crashes.

Long popcorn. Short S&P.

chunga's picture

visit dailyspammer. com for all your virus and malware needs zyrthis

83_vf_1100_c's picture

OT as usual and likewise the requisite link to your virus laden website. I saw pics of a mostly nude Rhonda Rousey and it put me off UFC chicks. If I want to see tits I can find those on 60% of the web at less risk of contracting puter malware or I'll walk into the LR and pull up the wife's shirt. Real live warm squeezable tits, better than VR.

Oh, almost forgot... Fuck you spammer and your Mom too. Yeah, she deserves it for birthing you when Roe v Wade offered a reasonable alternative. I assume she knew the father and therefore had to be aware of the outcome. If the Dad was just a John during one of her coke binges... Fuck her anyways. And fuck you.

cossack55's picture

I am one and support the other

Lorca's Novena's picture

Can they do "community organizing" better than humans? 

 

 

Were screwed

 

*All Hail Your Robot Overlords

Gold...Bitches's picture

I tell the kid at least once a week that he better specialize or he'll be shit out of luck - know how to program/repair these things or you'll be on the govt handout program.

Mr Pink's picture

That's sounds like a good idea but Ican't help but wonder if all these kids learning to write code are gonna be shit out of luck too. 

There are already computers that are writing their own code. These things are given a task and a billion lines of code to pick from.

My guess is in 10-20 years people will be learning new trades every few years. By then technology will be changing so fast humans won't be able to keep up

Painting houses might be a good idea...or  plumbing?

DipshitMiddleClassWhiteKid's picture

there are alot of people in corporate america who are going to be replaced by people who can code macros like myself

 

they are atleast 15 years behind the 'tech' world 

 

 

Hal n back's picture

can we next have an automated algo AI  Congress

biker's picture
biker (not verified) Mar 28, 2017 6:06 PM

Y2K, leap year flash crash, blue screen trades, servo manipulated markets, data spoofed malfeasance, hacked trades

 

Robots to replace bloated executives and worthless management. Managers do nothing a Robot meeting maker couldnt do.

Hal n back's picture

I am 6'2" and 195 pounds-I am not bloated!

Yen Cross's picture

  It called the> Larry Fink 9000<

 

 * What happens when the day trading and swing trading algos clash?

knukles's picture

Let me tell you, they will not make the next cover of Cosmopolitan!

peippe's picture

BlackRock HAL 9.5 Reporting:\::All sentient humanoids with jobclass 'analyst// nyse' your services r n0 l0nger required;;

                                               Pleas report all pass key digit & otherwise to Front desk biped security personnel;;

                                               Personalaffects will be shipped COD to humanoid domocile, make no attempt to clear desk(s).

>halt transmission<

biker's picture
biker (not verified) Mar 28, 2017 6:08 PM

Save the world/get a promotion.

Create Robots that Replace your Manager.

 


Colonel Klink's picture

Blackcock, just two clicks away. -Ted 2

And we all know who's giving it to the goy.

Bob's picture

Well, it's not just bricklayers, burger flippers, uber drivers and other icons of the contemptible entitlement-minded working class. 

What a tragedy! 

Paper pushing parasites replaced by the casino.   

If that don't beat all!

Giant Meteor's picture

Fucking poetic justice .. ya really gotta appreciate it ..

earleflorida's picture

alittle ot,..but i hope before i die i can find sexbot babe that's only been divorced but once...

the big`fail?

stubb's picture

The ability to mass-produce hot babes will drive the price down to where everyone can afford one. It will also knock a huge and richly-deserved hole in the feminism-thought control complex. Hopefully. 

Will Elon Musk be the Henry Ford of pussy? 

Bobbyrib's picture

The only reason passive investment management funds are preferred is because Yellen just keeps propping up the stock market. When the crash finally happens it will be ugly.

The fund managers better become CFP's.

scintillator9's picture

Aircraft carriers vs dinghies....

Where has that scenario played out before with disastrous consequences to the aircraft carriers until the game was reset?

https://en.wikipedia.org/wiki/Millennium_Challenge_2002

Is-Be's picture

Of cause machine intelligence is going to outpace human intelligence. The exponential function will do that.

The problem still lies with humans though. We wrote the laws telling the machine to maximize shareholder profits. It is doing just that.

The solution then is to recognize that companies are NOT HUMANS. They are an artifact that has outlived its usefulness to US. Shareholders are not divine beings. They are cunning little monkeys, stealing all the bannanas and wasting those that they cannot eat.

I think that it is going to take a bloody war to shake the "Companies and shareholders are Sacred cows" model from our collective Left Brains.

Bob's picture

Could it be accomplished with anything less?

I sure as hell don't see it. 

Twee Surgeon's picture

The Stock Pickers are now the future ingredients of Pot Stickers, Replaced by a Robot and so it goes.........

Welcome to America now, Pot Sticker Pork Shoulders.

https://www.youtube.com/watch?v=qWkvFssMz24

e_goldstein's picture

Oh no! I hope the former Blackrock traders don't jump out of any high windows.

(jk)

Giant Meteor's picture

If they were smart they'd band together and start pushing the computers out of the window ..

Ok, ok I know that's not practical. Still there are other ways. Not to mention the fact, what is the incentive on keepin quiet now? Start singing boys and girls, ya really got nothing to lose now ...

Welcome to the club! It's a big club, and we're all in it !

small axe's picture

bury the stock pickers in a mass grave alongside the bond vigilantes (who used to penalize governments that overspent and overprinted, rather than reward them with lower rates).

RIP, carbon based life forms. You no longer fit the narrative.

stant's picture

Will it be called the madeoff 9000?

orangegeek's picture

Blackrock's first stock pick - that would be Orville Redenbacher.

dasein211's picture

In case you guys haven't figured it out there will be no more crashes allowed. They can seriously print money and throw it at any balance sheet hole. And just when you think inflation is about to take off they stop prints by and raise rates a little. Asset prices slowly go up for them while your meager earnings get inflated away slow enough for most people to not notice a huge change. That's the plan guys. In order to stop it the only hope is digital currencies. There isn't shit they can do to stop block chains. It's the only way people will be able to protect their earnings and be able to protect the worth of their currency.

peterk's picture

you must all realise  why this  is being done...ita a cost saving exercise brought on my the low

interest rate environment. It wont boost retuens  only save money.

Bad move.

Robots cn never  do what a  telented trader can... its simple as that, and its  due to one simple

thing:  Markets are HUMAN

Lorca&#039;s Novena's picture

Surely you jest? I can show you 4 plays a week at minimum 100%.

Captain Sensible's picture

Robots cn never  do what a  telented trader can... its simple as that, and its  due to one simple

thing:  Markets are HUMAN

 

True. Cheap execution is where the value is with technology and financial markets. Prop Trading is about discipline and elite performance. The ability to adapt context within a proven methodology.  A really good discretionary trader will outperform the majority of systems, but the execution in scale is why funds are doing well 1) A defined trend in Equities with no volatility and 2) Mediocre performance in size suits funds. 

There is always a human decision at some point even in an automated system. When to turn it on or off is a simple example. 

Mithera's picture

Get a job as a hospital orderely. It will be a long time before they can build a machine to wipe the shitty arse of a demented disabled ex- feminista.

83_vf_1100_c's picture

You'll just be replaced by the ShitBot 1000. Odds are that ass you hope to wipe will end up on the protein reclamation conveyor belt to feed the still useful biologic units. Me, I am going to get more serious about my gardening and animal husbandry skills.

Grandad Grumps's picture

Computers control price already. Our ninhuman controllers are seemingly in a big hurry to make humans obsolete.

What us the rush? Are they worried about something?

mary mary's picture

I understand that computers are also replacing a lot of journalists.  Maybe not too long from now those 5 men who meet every morning to decide what news shall be aired will be the only 5 people working in journalism.

mary mary's picture

I think that one reason index funds have become more popular is that more investors have given up on trading because high-frequency-traders have made themselves an extra, and expensive, level of middlemen, and the stock exchanges have enabled and facilitated those high-frequency-traders.

TrumpRally's picture

The computers are unable to understand context.  As a retired financial adviser that is what is important.  

Is-Be's picture

You used the present tense. Surely you meant to use the past tense?

TrumpRally's picture

I am going on 75 years old and am retired from the financial industry.  You bet they are going to the computer type of algorithms because it will be cheaper and the clients do not know any better. Plus most analysts are  just paid to say and do what their advertisers and backers tell them  to do. Honestly if you think any of these brokerages houses is honest then you have been roped into the biggest con of the century.

 

There is only one exception to analysts. Only one analyst who is actualy good and has a proven track record. That is Shepwave.  They will peiodically show past market calls in stocks, oil and gold on their blog or on their FB page.   https://www.facebook.com/166578775325/photos/a.10153488951800326.1073741827.166578775325/10154415124400326/?type=3&theater