The stock market has changed, and we're going to have to do things differently

The stock market has changed, and investors are going to have to sharpen their wits.

That's according to Dmitry Balyasny, the managing partner at the billion-dollar hedge fund Balyasny Asset Management. The firm managed $12.6 billion in hedge-fund assets at the start of the year, according to the Hedge Fund Intelligence Billion Dollar Club ranking.

Balyasny wrote in a letter to investors that the rise of passive investing and quant funds and a surge in hedge-fund assets had made the stock market more efficient, leaving fewer easy money-making opportunities.

It's certainly been true that as exchange-traded funds have increased their share of the stock market, they've been blamed for suppressing fluctuations and pushing a measure of volatility to near-record lows.

ETFs, which simply track an index, have hoovered up assets at a high rate over the past decade. US-listed ETFs saw $283 billion in net inflows during 2016, taking aggregate assets under management to $2.5 trillion, according to Citigroup.

Balyasny notes that passive investors now own more than one-third of the US stock market and fundamental stock investors make up only a small fraction of total trading each day.
This has a few implications, according to Balyasny — in particular, an increase in the relative importance of stock-price catalysts, such as earnings releases.

Balyasny cites Japan as an example of what happens to markets with high levels of passive ownership. More than 70% of Japanese stocks are passively owned, according to the letter, given the Bank of Japan's stock-buying program, "yet liquidity in Japan is fine, and the fundamental stock selection opportunities remain robust," he said.

In other words, passive investing doesn't kill stock-picking. It just puts an emphasis on calling the big catalysts for stock moves right.

Quant funds have become popular with investors and are hoovering up assets. According to a recent Credit Suisse survey, about 60% of global institutional investors said they were likely to increase allocations to incorporate some quantitative analysis over the next three to five years, with pensions showing the most interest.

According to Balyasny, it isn't a case of fundamental investing versus quant investing; the two need to combine. From the letter:

"Some of our worst trades are caused by an over-reliance on data without a variant fundamental view (e.g., a short position in a fundamentally challenged business with deteriorating current data where results come in close enough in light of low expectations to cause a big squeeze).

"On the flip side, some of our best trades have been when our teams identify some fundamental inflection in a business that has not been picked up yet in the data. Each approach can be successful on its own if practiced by a top team, but combining the two will lead to the best results."

Source: Business Insider
Trader I. Ivanov

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