Hedge Funds: Do Not Go Gentle Into That Good Night

Hedge Funds - and active managers in general - have been under fire for several years. Almost 50% of Hedge Funds saw a decline in assets under management (AUM) in 2018.

On the surface, it makes sense ... during a long-term bull market, indexes and other passive options like ETFs become en vogue. During a bear market, active management offers more opportunities to outperform the market. 

Hedge funds are designed to, you guessed it, hedge risk. So, when investors see less risk in indexes, the demand for active management declines. Especially when performance declines as well. 

via Bloomberg

When something monumental changes the past is left behind and you begin a new future. When electricity was created, no one was going to make candles the primary form of lighting. After the introduction of the car, horses & buggies were never going to be the #1 mode of transportation, and we're also seeing that with the adoption of AI & automation. 

Most changes aren't monumental.

I have a fundamental belief that things go in and out of phase and that what's once old is often new again. You see it with fashion, music, phones - etc. First phones got bigger in order to do more, then smaller for convenience, and then larger again so that old dudes like me can read the text. 

I believe it's the same with active management - the techniques may have gone out of phase - but active management still offers the potential outperformance. The trend mirrors the stock market; bulls turn to bears when buyers run out - so as outflows from funds continue to peak, and funds continue to close, it seems reasonable that there will come a time when demand rises again. 

At that point, "active management" will give way to "Active Switching™" (which goes beyond stock picking to choose the markets, techniques, time frames, risk levels, allocation strategies, etc. using a variety of techniques, data sources, and real-time contextual clues).

This is part of what's covered in my upcoming book, "Next On Wall Street: Understanding AI's Inevitable Impact on Trading."

Looking forward to launching that book in early 2020.