Hedge Fund Jobs and the Rise of the Machines

Robots, once the bane of blue-collar workers, may now threaten the livelihoods of hedge fund professionals. Taxi and Uber drivers are menaced by driver-less technology, fast food workers are marginalized by robots capable of making a burger in less than ten seconds, and BlackRock, Inc. is implementing data-driven, artificial intelligence (AI) programs that will ultimately replace as many as seven portfolio managers and dozens of analysts.

BlackRock’s foray into robotic investment represents its latest effort to rescue an actively managed equities business on the decline. BlackRock’s actively managed equity assets, which stood at $317 billion in December 2013, dwindled to $275 billion by December 2016.

Clearly, BlackRock is not the only firm facing this problem. In the last twelve months, $442 billion flowed from actively managed equities, while $542 billion surged into passive index funds—a swing of almost $1 trillion.

What’s Driving This?

It is relatively easy to grasp the cost/benefit of robotic short order cooks but the driving forces behind robotic investment are more complex. The two factors driving this decision are performance and fees. While the jury is still out on the performance metrics of robotic investment, the fee side of the equation is less opaque.

These calculations will make the rationale for robotic investment clear. According to the Investment Company Institute, mutual fund managers earn about $131 in fees per $10,000 invested. Contrast this with the $18 in fees earned on $10,000 invested in passively managed index and exchange traded funds.

Based on BlackRock’s portfolio of $275 billion, robotic portfolio management has the potential to reduce fees from around $3.6 billion to about $49.5 million. Of course, these calculations do not factor in development and implementation costs. In the case of BlackRock, these expenses may be offset by eliminating the salary and bonuses of multiple portfolio managers and dozens of analysts. One thing is certain; the potential fee savings for investors are staggering.

Implications for Hedge Funds

Hedge funds face similar performance and fee challenges. However, hedge funds have succeeded in maintaining asset growth through the majority of the years following 2005 and have recently achieved all time highs in terms of assets under management.

This is not to say that the hedge fund industry is behind the curve in its efforts to incorporate AI, algorithms, and similar robotic investment strategies. One need not look beyond such firms as Renaissance Technology, Bridgewater Associates, and Steve Cohen’s Point 72 Asset Management, which recently set up a vehicle to finance AI startups.

What Does This Mean for Hedge Fund Jobs?

The hedge fund industry has unique relationships with its investors as compared to actively managed U.S. stock funds, which have a significant retail investor component. The relationships between hedge fund investors and portfolio managers are profound and, as such, will be particularly resistant to exclusively robotic portfolio management.

While the hedge fund industry explores and employs the technology, it is unlikely to be something other than a zero-sum game in terms of job opportunities in the industry.

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