Some would say that the last few decades in the investing world have been defined by the rise of the index fund. But at the same time, active managers still hold a great deal of power in the market, especially at the institutional investment level. Most recently, the market has seen an uptick in what can be considered a blending of these styles, through products like thematic ETFs and active ETFs.
We recently hosted Robin Wigglesworth, author of Trillions and global finance correspondent at the Financial Times, and a group of asset management executives to discuss exactly this shift. At Boosted.ai, we are laser-focused on figuring out where the active vs. passive debate goes from here, especially as it relates to finding alpha through technology.
While we hold these intimate roundtables under Chatham House Rule, we’re sharing here the top four takeaways we gleaned from the discussion.
- A quantamental approach is here to stay. Managers are increasingly adopting a quantamental investing style, which combines the best attributes of humans and machines. Our point of view is that humans with capital markets expertise should guide machines, which themselves have significantly more processing power than any one individual. Different managers are “outsourcing” different aspects of the investing process to technology in various ways, but the consensus is that coupling technology like AI with the right human experience is now table stakes for investing success.
- Indexing is eating the world. What started in the equities realm has exploded into bonds, commodities, and currencies – and there are no signs of stopping. A bitcoin futures ETF has already been approved in the US, and some in the industry even talk about creating a live investible index of all global assets.
- But alpha still exists. While indexing may appear to make markets ever-more-efficient, active managers can still capture alpha and outperform the market through a number of methods. From our unique perspective, we’ve seen portfolio managers tap into the power of explainable machine learning to generate that alpha and get ahead of market trends. The rise of indexing itself may in fact lead to market opportunities that can be capitalized on by savvy managers.
- The most interesting investors – and opportunities – may be some of the least known. The investing world tends to gravitate toward a select few personalities who have over the years become financial demigods. But the last decade in investing has been defined by teams of quants and countless algorithms more than any one human. Sometimes, it pays to go against the current and explore opportunities that the industry may be overlooking.
As the investment management industry continues to mature and evolve, we believe there will always be opportunities to create a more efficient market and achieve outperformance. Emerging technologies like AI are playing an increasingly critical role in that process, and the most sophisticated managers are combining that with domain-specific human expertise.
The active vs. passive debate will not be ending anytime soon, but if there’s one thing we’re certain about, it’s that technology is an opportunity for both ends of the spectrum.
To learn more about explainable machine learning for investing – or to simply discuss the future of AI-powered ETFs – reach out to us for a conversation.