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Have computer-led strategies distorted asset prices?

Algorithms_quantsAfter the initial ripple effects following the coronavirus outbreak, weeks passed with markets showing no signs of caring.

“Looking at some of the market moves in recent months, you could have expected the opposite to happen based on what’s been going on in the economy and the macro-environment,” says Tom Becket, chief investment officer at Psigma Investment Management.

The fund manager believes “influences are a work” that are distorting market reality. Market behaviour is now being driven by algorithms.

“I don’t know whether it’s artificial intelligence or strategies built around algorithmic processes, but computer-based trading strategies are having a growing and historically different influence on markets,” Becket.

So, is the “egregious evaluation” of certain parts of the market caused by computer-led investments? “I think 100% it’s compounding it.”

The investment industry is operating in a different paradigm now, Becket says. In the past, markets were predominantly driven by humans making investment decisions. “We were real buyers.”

But in September last year, Bloomberg reported that passive equity strategies had surpassed their active stock-picker counterparts for the first time in history. Passive strategies are machine-driven and rules-based, just like smart beta and, at least predominantly, quants.

This fundamental shift towards computer-driven investments is having a profound effect on valuations.

Read the full article here: Coronavirus: Did AI miss the coronavirus effect?

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