Transformation and Change aka Jumping the Shark

It is amazing how quickly change can flow through an industry.

It was not more than a couple of years ago that active management and fundamental-based research was the core of the industry. Now, less than 6 years after the financial crisis, active management is in full retreat and human-based fundamental analysis is increasingly marginalized. If I had to put a date on when active management jumped the shark, I would tentatively place it at 2014. Of course, active management still dominates the industry and that is not going to change for quite some time. But the secular trends are clearly in place and the level of knowledge and understanding among the masses is growing.

Information and computers have transformed the industry and the research function, and will no doubt transform the advisor function in the next 5 years or so.

Big bang vs slow drip

Big bang changes like 1.50% drops in Fed Funds rates, or $750 billion stimulus packages, or $700b TARP-type packages are only possible in crisis situations.

But once the panic is over, there is still a need for enacting good policy. And often, that policy change is more important for the long term health of the economy than the immediate response to the crisis.

But getting major policy change enacted becomes more and more difficult the further away from the crisis you get. It becomes like a slow drip to the electorate as they lose focus and move onto other things.

Death by a thousand cuts.

We're not in Kansas anymore Toto

I've written about this before, but I think it bears repeating.

The market and the environment in which investment decisions are made and investors interact has meaningfully changed over the past fifteen to twenty years or so.

The advent of new players (bank prop desks), new investment vehicles (hedge funds, SWFs, private equity), new investment instruments (ETFs, fixed income related derivatives), new quant strategies (HFT), increasing computing power, access to and the manipulation of voluminous mountains of financial data, and the willingness to use leverage, all combined with evolving academic support for momentum strategies has changed dramatically the nature and complexion of investment markets.

The best way I can think of to describe the market these days is either like a run and gun engagement, or as a game of chicken. Either way, it usually ends badly for someone.

I would also point out that these changes to and in markets, parallel in many ways some of the changes to our society and culture.