Active Management In The Wake of Pandemic

It's apparent that the first 4 months of the year have been anything but normal ... Challenging to say the least.

The increased volatility and noise tested active managers' mettle intensely and often. While even a blind squirrel finds a nut in a forest (for example, during a bull market ...) this type of environment provides an increased opportunity for both under and outperformance as luck and skill collide. 

History will show that the majority of funds struggled in the first quarter of 2020 - driven by the volatility and uncertainty in the midst of a global pandemic.

Investors pulled out ~$33 billion when asset values initially plunged. Yet, the rush to cash was only the beginning, in the first quarter, asset value plunged $366 billion. Redemptions hit large hedge funds the hardest. Meanwhile, funds with less than $1 billion under management only lost $1.6 billion to net redemptions. 

That being said, as is often the case in both volatile and bear markets - people are checking out the state-of-the-art active management strategies. Interest in hedge funds is at a three-year high, as many people fear that what used to work simply isn't good enough anymore.

I suspect that technology-enhanced strategies will gain ground during the next few years as A.I. and exponential technologies get better and gain traction in asset management, risk control, and data management.  Algorithms will improve, hardware will get faster, digital signal processing will become more accurate, and it will be easier to identify and produce data sources that increase the efficiency, effectiveness, or certainty of outcomes.  The likely result will be a reduction in the cost to produce a unit of alpha, which bodes well for forward-looking investors.

As we slowly move toward normalcy, what can we expect to see?

Institutional Investors are optimistic as well.  Here are selected responses from a survey of 125 institutions.

via Institutional Investor

94% of respondents said that their institutions had done a good job managing response to COVID-19, with 44% believing they'd done very well. This contrasts with their belief on how the government handled the crisis, but shows an opportunity for a strong rebound for businesses. 

In past weeks, I've focused on this crisis as an opportunity for reflection and growth. Personally, I continue to brainstorm ways to combine the old way and the new way to create something better. Institutional Investors express similar sentiment here. 

via Institutional Investor 

As of 4/21/2020, 66% of respondents believe the focus should be on the health of the public, that will likely soon shift to stabilizing the economy, and subsequently shift to growing the economy. 

I believe we'll see similar responses from active managers and from entrepreneurs. This is an opportunity to improve operations, adopt better practices, and set higher standards. 

It doesn't make sense to shoot for going back to where we were.  This much pain and effort likely creates the fertile ground for something better.

Onwards!