Quants Haven't Made Human Investors Obsolete Just Yet

Tyler Durden's picture

We are already unquestionably living in the era of the quantitative fund: Not only are quant funds receiving a larger percentage of new investor money than their discretionary peers, but as JPM Morgan’s head quant noted earlier this month, passive and quantitative funds now account for about 60% of equity assets, compared with less than 30% a decade ago.

Indeed, the chart below confirms what JPM already revealed: "for now, systematic traders are the dominating force in markets."

But while the asset-management space is increasingly looking like a “quant’s world”, with carbon-based traders looking increasingly anachronistic, a handful of fund managers are aggressively pushing back against the notion that human investors are headed toward obsolescence.

At least that’s what a quartet of money managers have posited in recent weeks, according to Bloomberg.

“Winton, a $30.6 billion hedge fund that’s used algorithms to trade for two decades, told clients that people must still make the big decisions. Michael Hintze, who runs another major fund, said computer models can spot market anomalies but rarely provide answers. Jordi Visser, investment chief at a third firm, said humans still have the upper hand when it comes to recognizing patterns. Billionaire bond manager Jeffrey Gundlach said he’s betting people will prevail."

“Despite the immense power of modern computing, it is neither advisable -- nor even possible -- to dispense with humans entirely,” Winton, founded by David Harding, who earned a degree in theoretical physics before going into finance, wrote in its letter to clients this month.”

These fund managers are not alone in their belief in the essentiality of human reasoning: Treasury Secretary Steven Mnuchin said that he isn’t worried about artificial intelligence taking American’s jobs. Never mind that his remarks arrived on the same day as a PWC report which showed that more than a third of U.S. jobs could be at "high risk" of automation by the early 2030s, a percentage that’s greater than in Britain, Germany and Japan.

Not to mention what Bloomberg described as “a crescendo of warnings from the likes of Federal Reserve Chair Janet Yellen and software billionaire Bill Gates that big data and machine learning may unleash a wave of automation on the US.”

Doubleline Capital’s Gundlach said he doesn’t believe in machine’s taking over finance. His advice for beating them? “Work hard.”

Jeff Gundlach

Winton said that while some tasks, like recurring calculations for assessing risk and vetting trading algorithms for anomalies, might be outsourced to computers. Most investment decisions at the fund will still need to be vetted by humans.

“Winton wrote in its letter, there are big tasks at hedge funds ripe for automation, such as performing large-scale, recurring calculations for assessing risk across portfolios. But according to the firm, whose 450 employees include astrophysicists and other scientists, computers are far from ready to make investing decisions independently. Instead, people will be running software at every stage of the process.


Winton managers design and choose algorithms that are ultimately approved or rejected by its investment board. And while computers are better suited to handle early stages of checking data, once anomalies are flagged, humans are better at cross-referencing the irregularities against other sources to draw conclusions, the London-based firm said.”


“The notion that human involvement in investment management should, or even could, be fully automated is wide of the mark,” Winton, which returned 1.3 percent this year through May on its main fund, wrote in the letter.”

To be sure, none of this will stop the biggest banks – and at least one fund - from trying to automate as many tasks as possible, from aspects of underwriting, to asset management, to legal tasks.

“Billionaire trader Steven Cohen is experimenting with ways to automate his best money managers. Goldman Sachs Group Inc. is developing systems to eliminate hundreds of hours of human labor in initial public offerings. JPMorgan Chase & Co. is using machine-learning techniques to take over work from lawyers. (Its CEO, Jamie Dimon, said in an interview published Monday that people are massively overreacting to the threat of technology.)”

But even the automation of low-level tasks could threaten at least one crucial aspect of the hedge-fund industry: The exorbitant fees charged by most managers.

“Hedge fund managers, for example, traditionally charged clients 2 percent of assets and 20 percent of profits. It’s harder to justify if automated platforms can achieve decent results without a big bite. Such has been the case with index funds.”

Some fund managers are also skeptical of backtesting – the process of trying to determine the efficacy of a trading algorithm by checking it against historical data. Successful traders will find ways to incorporate technology into their processes without relying on it alone to drive investment decisions, one fund manager said.

“The industry’s survivors will be the ones who imbibe technology into their processes, Visser said. The trick is to use a combination of human judgment and models, “while artificial intelligence tries to catch up to the power of the brain,” he said.”

And while some quant-driven strategies have certainly proven successful at sniffing out market anomalies, successful investors still need to grasp the basics.

"Hintze at CQS, a $14 billion hedge fund based in London, concedes that quant-driven strategies are here to stay, and that they’re good at taking advantage of anomalies in markets. While engineering and mathematics are intriguing, successful investing is based on an understanding of fundamentals, technicals and investor sentiment, he said."

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4shzl's picture

When it comes to Gundlach, less is more.  Tylers please take note.

Luc X. Ifer's picture

Gundlach is an idiot walking backwards with his head pushed deep, till shoulders in his ass.
Only a retard or a cheapster can think that 'working hard' is enough to beat a computer at executing algorithmic logic.

NidStyles's picture

Computers generating revenue out of thin air pretty much confirms the said revenue and its representative currency is actually worthless.

Luc X. Ifer's picture

It doesn't matter, as long as the computers help the beneficiaries and beneficiaries are happy, it means they do their job properly - same as human workers.

PT's picture

Computers can't replace human traders.  No-one has yet worked out how to introduce the computers to hookers and blow.

They can't be bribed or blackmailed.

But they can cancel their orders.

They can't run for Congress.  But they can't get done for insider trading any way.

wildbad's picture

i made myself obsolete in 1987

xtremers9's picture

quants will never completely replace human traders. computers are great at solving things with 100% clear solutions. if X, then ALWAYS Y.


But that doesn't exist in trading. no trading strategy is going to work forever. there is no clear solution and there never will be. trading is essentially predicting the future, and computers can't predict the future.

medium giraffe's picture

whatever they are doing, they still like to group their big buys at a similar price level.  it makes things much easier imho.

amanfromMars's picture

Doubleline Capital’s Gundlach said he doesn’t believe in machine’s taking over finance. His advice for beating them? “Work hard.”

Oh please, you cannot be serious, Gundlach. Hard work is for unskilled labourers. Think and share novel viable imaginative realities as virtual solutions to current practical problems is how futures and derivative markets are built in the Remote Command and Control Space Place which delivers Experiments and drivers the Human Experience.  IT also easily destroys them with or without old style fiat billionaire fortunes not secured against such as be Advanced IntelAIgent Attack Vectors.


And surely such is not entirely unkown to, or not to be expected by a theoretical physicist, working hard at nothing physical.

PT's picture

PT predicts Gundlach's new advice after he hears that you are complaining that working harder won't help:

1.  Work harder.
2.  Work smarter.
3.  Take on risk.  That's the trouble with you young pussies.  You never take on any risk. *
4.  NO NO NO NO Noooooooooooooooooooooooooooo, you need learn to MANAGE your risk. **

There.  That should keep you busy for a little while longer and you won't have to hassle Gundlach while you work through that list.
You're welcome.   Yes, I have published a similar list before.  Last couple of times I called it The Labour Lies but hey, it fits here too.





* Doesn't that sound more sophisticated than, "Borrow money even though you don't know how to pay it back"?
** Doesn't that sound smarter than, "Find some sucker onto whom you can offload all of your mistakes"?

ichan's picture

Computers = bullshit. And they can continue the bullshit indefinitely. Because well math still can't smell bullshit and so the machines can't smell themselves.

Wall St. and Washington REEK of bullshit. We need freshen the world of the rot.

PT's picture

PT is desperately trying to extract computers from his ability to obtain an income.  Due to this:



ds's picture

Yes, These are tools that still need human acumen. The tools are getting more sophisticated that they need fewer of the existing skills. Work hard is correct for the real talents (10%) not the wannabees 90% who are in denial that are not replacable by quants and thie tools. 

cognitive dissident's picture

So... the new bond cuck has 'spoken' ... again... what the fuck ever gundy...

Too-Big-to-Bail's picture

If it means extremely high-paid Wall Street parasites get paid less, then I am all for that