Howard Marks looks ahead to markets with reduced role of people
(Bloomberg) -- Billionaire Howard Marks said the rise of index funds and computer-driven trading are reducing the role of people in the markets but creating room for a select few money managers to excel.
In a 17-page memo Monday, the co-chairman of investment firm Oaktree Capital Group LLC analyzed the effects of three industry trends: the increased use of passive, quantitative and artificial intelligence strategies in investing. On the first, Marks, 72, sees money continuing to flow into index products including exchange-traded funds. That has benefits such as reduced fees, trading costs and errors for investors, but a few active managers will outperform and remain in demand, he wrote.
“The bottom line is that the wisdom of investing passively depends, ironically, on some people investing actively," Marks said in the letter to clients. "When active investing is dismissed totally and all active efforts cease, passive investing will become imprudent and opportunities for superior returns from active investing will reemerge."
Marks was also bullish on the need for humans even as machine learning advances in its ability to spot and execute trades.
Algorithms can handle more data, generally make fewer mistakes and never forget to rebalance but have their limits, Marks wrote. He pointed to one of the best quant hedge fund firms -- Renaissance Technologies -- noting that even its Medallion Fund has a cap on the amount of capital it can invest successfully.
"I doubt computers can do what the very best investors do," Marks wrote, citing the ability to size up the quality of a company’s chief executive officer, sift through venture capital pitches or tell which new building will attract the most tenants.
"Computers, artificial intelligence and big data will help investors know more and make better quantitative decisions. But until computers have creativity, taste, discernment and judgment, I think there’ll be a role for investors with alpha," he wrote.
Marks co-founded Los Angeles-based Oaktree in 1995. The firm is one of the world’s largest alternative and distressed investment firms with $121 billion in assets under management as of March 31.