FIFTY YEARS ago investing was a distinctly human affair. "People would have to take each other out, and dealers would entertain fund managers, and no one would know what the prices were," says Ray Dalio, who worked on the trading floor of the New York Stock Exchange (NYSE) in the early 1970s before founding Bridgewater Associates, now the world's largest hedge fund. Kenneth Jacobs, the boss of Lazard, an investment bank, remembers using a pocket calculator to analyse figures gleaned from company reports. His older colleagues used slide rules. Even by the 1980s "reading the Wall Street Journal on your way into work, a television on the trading floor and a ticker tape" offered a significant information advantage, recalls one investor. Since then the role humans play in trading has diminished rapidly. In their place have come computers, algorithms and passive managers--institutions which offer an index fund that holds a basket of shares to match the return of the stockmarket, or sectors of it, rather than trying to beat it (see chart 1).
Are you concerned or encouraged by the onset of technologies that provide automation? Technologies including machine learning and robotic process automation are set to eliminate up to 30 percent of human bank jobs, according to a new report. New alternatives to human workers are becoming desirable within the financial services, as the technology for automation is becoming more affordable. Roles under threat typically involve a degree of manual work, the kind that is often involved in managing databases and libraries, tasks that can be handled easily by the algorithms within machine learning. This statistic has come from a new McKinsey & Company report, says Bloomberg, who were told by Jared Moon, a co-writer of the report, that the change will "require people to use new skill sets, taking away manual work but allowing more around analytics, transformation and change."
Financial technology is disrupting traditional approaches to investing, and BlackRock Inc.'s recent announcement that it is replacing human stock pickers with machine-run algorithms for some of its equity funds, signals that the money management industry is getting the message. The decision by BlackRock, which has more than US$5 trillion in assets under management, follows a similar move by the world's largest hedge fund, Bridgewater Associates (US$160 billion in AUM), to start using software to automate its day-to-day decision making. The popularity of computerized quantitative trading strategies, and the growing use of artificial intelligence (AI) techniques, stems in large part from their impressive returns. AI and machine learning hedge funds outperformed both traditional quantitative and the average global hedge fund, with annualized gains of 10.6 per cent over a two year period, according to Eurekahege. These new machine-based funds also posted better risk-adjusted returns, with considerably lower volatility.