We are entering a period of even more intense changes brought about by rapidly developing AI technologies. For the most part, they are having a negative impact on the profitability of retail investors’ and traders’ systems. Below I have collected problems that look like the most threatening to long-term profitability. For different people, their intensity will vary, while they are bound to increase. At some point they will affect every trader and will have to be solved. After describing each of them, along with possible consequences, I will give some suggestions for seeking solutions
PROBLEM 1: Changing the model of successful investing
According to research by LCH Investments (the oldest fund that invests in other hedge funds), the top 20 funds earned $22 billion last year. One of them, Citadel, run by Ken Griffin, earned 16 billion (72%).
The importance of this result is underscored by the fact that last year was a very tough year for funds. According to the same study, the entire industry lost more than $208 billion last year.
The reason for the big difference between the best and the rest was not only the tough market. We are dealing with the first results of the emergence of a completely new quality. The model of a successful fund has changed and the model of successful investing has changed. It is no secret that it is Citadel that has been building and perfecting it for several years.
In short: The new fund model is a number of thematic teams specializing in narrow areas: e.g. specific currencies, sectors. Here traders’ knowledge is supported by new technologies: quants, alternative data and edge analysis along the entire investment process.
As a result, teams are formed that have an advantage at multiple points (new term: multiedge) and practically suck money out of the markets on both ups and downs.
As a result, other traders or investors lose. They are no longer competing with other investors. They are pitted against each other with teams of traders, scientists and programmers who study and improve every element of the investment process. This is how multiedge is created.
Their results are much more stable than other traders (and other funds).
This is not something that will pass. After the success of the Citadel model, the entire investment industry will begin to emulate it. Within four to five years, the new model may appear in 40-50% of funds.
This model is winning the race for clients’ cash. It gives stable, high returns with less risk. The team has better strategies, a more complete picture of the market, and can find and exploit the best signals to the maximum faster.
As a result, little liquidity is left for other market players to exploit.
PROBLEM 2: Declining liquidity is also the result of crowding and increasing automation
Crowding is the crowding of strategies. The basic strategies are quite well known and the signals from them are watched by thousands of traders.
In strategies that have well-defined rules and steps to follow – some of the liquidity is picked up by automatons (these strategies are the easiest to automate). There is a growing saturation of AI (artificial intelligence) tools in funds. More and more strategies will undergo automation.
For retail traders, this means looking for new markets or new strategies. A trader who a dozen years ago could make a living using one system suddenly faces the challenge of finding “something new.” Usually he is not prepared for this, he knows his trade or his “system” well and does not know how to find something new, how to run and test it.
The second option is to review one’s own investment process with a view to improving it and drawing out to the maximum what it can bring. This is a program that every trader should start practically yesterday.
Improving your investment process is inevitable, any new strategy will also be at risk, and you should know how to get the most out of it while you can.