Is There A Future For Trading And Investing?
In the past month, I've conducted multiple educational events and met with traders and portfolio managers at a wide range of firms in different countries. It's been a great overview of what is on the minds of market participants.
So what are today's traders and investors focusing on? Possible shifts in global monetary policy? Continued geopolitical tensions? Gridlock in Washington? While those topics certainly enter conversations, there is a much more pressing topic dominating my meetings: the future of trading and investing in the face of ever-lower volatility and the increasing role of algorithmic market participation.
Indeed, I have never seen so much outright pessimism among traders about the future of their profession. Yes, I recall the negativity at major market lows in the early 1980s and in the wake of the 2008 collapse. This is different. Stocks are making all-time new highs. The economy is far from collapsing. Traders and investors, however, increasingly ask if they have a future. This is particularly true among shorter-term directional traders, who lament the "choppiness" of low volatility markets. They look at the trend toward evidence-based money management strategies, especially of a purely systematic nature, and wonder if their time has passed.
One of their greatest fears is that low volatility will be with us forever, dampening directional returns. Look at the returns of short-term traders, trend followers, and global macro participants since 2016: all, according to the Societe Generale indexes, are down meaningfully. It is difficult for discretionary money managers to justify their fees--and for professional traders to justify their salaries--with such performance.
Such pessimism has a way of becoming a self-fulfilling prophecy. Research from Barbara Fredrickson finds that positive emotional experience enhances our performance by broadening our perception and helping us build upon strengths. In one noteworthy experiment, she flashed pictures to experimental subjects who had high levels of well-being and high levels of stress. The stress group clearly observed what was in front of them; the well-being group additionally processed material at the fringes of their perceptual fields. In other words, stress had the effect of creating tunnel vision; positive experience had the effect of broadening perception. Ironically, it is when we need creative adaptation and broadened perception most--when our worlds are in flux--that we can become most stressed and rigid in our perception.
This is what I'm seeing among today's traders and investors: a high degree of consensus thinking during a time that calls for creative adaptation.
When we look outside our narrow trading worlds, we can broaden our perception and see that not all is gloomy. If we examine all strategies, hedge fund returns are up so far this year and indeed have been positive for 15 of the past 16 months. Naysayers may argue that those returns have not kept up with the overall stock market averages, but that is not the focus of strategies that have performed best, including relative value strategies, hedged equity strategies, and event strategies. As I pointed out in a recent Forbes blog post, a meaningful proportion of market participants are winning by innovating: trading multiple strategies and new strategies and implementing these with rigor and teamwork. Bringing this innovation to the training of traders has created areas of opportunity that previously did not exist. Quite simply, the positive emotional experience from innovation has broadened the perception of some traders and led them to uncover and exploit fresh areas of opportunity.
In short, many of the doubts nagging the minds of traders are the result of stress and tunnel vision: being locked in strategies that have not been working. There are successful investors and traders who have been innovating. They are not locked in what used to work and no longer does. They are looking at new markets. They are examining different time frames. They are adding spread trading, relative value trading, relative strength trading, options trading, volatility trading, and other strategies to their core strategies. One market participant I follow closely has found success by trading cycles in individual equities, not trends or ranges.
