Just when it seemed that discretionary stock pickers were in danger of being replaced by quants and passive investment funds, we have the kind of once in a generation black swan and once in a career market gyrations that emphasize the value of human judgement.
At least this is the verdict of Bobby Vedral, a former Goldman Sachs partner at head of global market strats, who left the firm after eight and a half years in early 2018. The coronavirus in particular is highlighting the importance of subjective judgement and context, says Vedral.
"In a data driven market it's a problem when you do not have the data," said Vedral. "In this market, you need to understand context as data is of no use with Covid-19."
The current financial systems is really only a few decades old, says Vedral. During that time nothing comparable to the current pandemic has taken place. As a result, traders who try to gain an edge from looking at historic data are both flying blind and desperately drawing false analogies.
"People always like to point to some data to give them a sense of knowing what's going on," he says. "In this case, they fell back to SARS but SARS was the wrong way to look at it. We now have the problem not just of the virus but of the weakness that it has exposed....This is likely to become a corporate credit/default crisis."
Ultimately, Vedral says discretionary stockpickers who can keep a cool head and understand the broader context of events are best placed to steer funds through this crisis. "This will lead to more hybrid funds," he predicts. "Systematic funds are fine 99% of the time, but for 1% of the time you need human intervention."
Photo by Jamie Hagan on Unsplash
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