Automation will profoundly change the nature of work

This is just a brief post on a topic I may explore in much greater depth on a different blog, writing under a different pseudonym. For now, just have a look at the first few minutes of this video: Schichtwechsel, die Roboter übernehmen. It’s available in German and French, but just mute it if you don’t understand either language. Instead, look at what those robots are doing.

You will see robots performing intricate assembly maneuvers in factories, but also robots in domains where you may not have expected them. I was quite surprised by the cooking robot that is able to produce a high-quality meal. Details are not really that important, though. Instead, the bigger picture is that automation will eliminate countless jobs. Unlike with previous industrial revolutions, there won’t be many other areas humans could work in. Recall that the Great Recession of 2008 and beyond led to dramatic job losses, and the subsequent gains were primarily in low-skilled service work. Pundits also spoke of a jobless recovery, partly due to automation.

I think we will see two main trends: a lot of manual work will disappear. There will always be a demand for human labor, catering to the whims of the rich. Just like you can by artisan chocolate for an inflated price nowadays, while the rabble buys mass manufactured products, future MGTOWs that are flush with cash will be able to use the services of high-class escorts. Joe Plumber, on the other hand, will need to make do with a VR headset and a robot vagina. The mainstream will be automation due to some combination of hardware and software.

Highly qualified work will also be affected. The other day I read a somewhat boisterous post by a guy bragging about his life as a radiologist, claiming he is making $500k a year, just looking at a bunch of image files a day, with 20 weeks of vacation. Well, buddy, in a couple of years an image recognition software will have eaten your lunch. That’s just one example. One industry that will be hit very hard may be finance, at least judging by the tremendous amounts of money investors have been betting on so-called FinTech startups, and if the traditional finance industry will be disrupted, I predict we will see some civil unrest. This won’t be so much due to ex-bankers rioting in the streets but because the average Joe will realize that something profound must be going on if professions that used to be safe bets for a career no longer guarantee a living.

What do you think? Let me know in the comments below, but keep the comment policy in mind.
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31 thoughts on “Automation will profoundly change the nature of work

  1. I attended a symposium some years ago where one of the speakers said “the reality is that there is going to be a lot less work, and our choices are whether we adapt to this by having more leisure or more unrest.” For jobs that cannot be automated, there is a lot of pressure to move them to lower wage environments where possible, or failing that import a foreign contract worker. Financial services are being decimated and it would be safe to assume that in a short time the numbers employed there will be a fraction of what they are now.

  2. Purely taken from an aesthetic standpoint I do like the choice of music in the beginning, it’s the opening section of Paul Dukas’ Symphonic Poem “L’Apprenti Sorcier” after the poem by Goethe. The music really fits the topic, great stuff! 😉

    1. We already have universal basic income in disguise in most of the West. In the Netherlands, for instance, the unemployable are declared “handicapped” and put on disability allowance. Somewhere I read that this applies to around 750,000 immigrants from North Africa and the Middle East. In Germany and the UK, welfare benefits are quite generous, particularly for immigrants.

    2. Dutch guy here, doesn’t happen that often (our politics is very against it (both putting people who are not disabled on disabled wellfare, and basic income), most of our universal basic income parties are left wing, and on the decline). That whole idea we the dutch are a progressive liberal free haven of prostitutes and drug users, long gone. We are becoming more like the USA I’m afraid.

      Being put on disability happens more often in Norway from what I know.

    3. I didn’t find a source, but I’m fairly certain I read an article about the Netherlands some time ago. I may have mixed things up, though. However, I found two studies showing that immigrants are dramatically overrepresented among disability pensioners in both Sweden and Norway:
      https://www.ncbi.nlm.nih.gov/pubmed/21188530
      http://www.gu.se/forskning/publikation?publicationId=35943
      In any case, it’s certainly not a “conspiracy theory” that immigrants who are unable or unwilling to work are put on a disability pension.

  3. I think that an actual universal basic income system is superior to what is now in effect in welfare states in Europe because it should significantly reduce red tape and it would also encourage people to work even if they are unemployed – since you will always have the basic income regardless of whether you work or don’t, it might be that most people who are leeching off of welfare nowadays won’t do it in such a system because the opportunity cost of not working will be higher. But even if the latter is not the case, reducing bureocracy is still pretty nice.

    AFAIK it’s not supposed to be applicable to immigrants, at least not until they get citizenship.

  4. I have just got a job at a big bank, in IT having left teaching… The systems here are so crap, and difficult to change incrementally that they need to start again. Once this is done, they will get rid of a lot of back room staff doing a lot crap, and increase the efficiency of the service.

    What was telling, after some discussions, banks prefer these inefficiencies, as they can make more money from it (think of the time it takes a check to clear). But with new fin tech increasing efficiency and charging less and customers unhappy about this, the bank needs to sort their shit out or lose customers.

    The banks were happy to produce crap software, not greatly engineered as it played in to their hands. But now they have to change, but the coders are revolting having to change how they code (ie get it working despite it being shit).

    1. Same here.
      I work at a big Bank, too, not in IT, but a an investment fund specialist.
      The time it takes our backoffice to set up stuff in the system (as simple as flagging an instrument as “OK to promote” takes a day (!) althougg it’s just a ticked box and a refreshing of the data. No… it needs 2-3 e-mails and a bi-weekly data load to get it shown in the system. Meanwhile front staff has to override 2-3 warnings an write lenghty explanations why they did so, which only is needed for Compliance. And don’t get me started on these guys… we call them “Selbstbeschäftigungsladen” (sth like “self occupation unit”).
      But yes in essence it’s 40-50 year old language and systems with tons of patches.

      As for the automation, some finance jobs will go, others never will.
      And yes the sell side of Investmentbanking is doomed, because margins for market access services (spread, commisdions) are going down in light of the fierce competition.

      But, they buy-side (Hedge Funds and Family offices, as well as Private Markets) won’t. There will be a big clean up in the investment fund landscape since robo-advisors will do cheaper with ETFs what so called actively managed investment funds charge lot of money for: Lots of beta (= index correlation) and no alpha (= index outperformance). Wait for it. These fuckers are doomed with their lousy 4-5% per year.

    2. It seems your view on hedge funds is a bit too optimistic. I saw quite a few posts on Zero Hedge about even long-running funds closing down. This wasn’t a result of automation, but of the inability to generate “alpha”. Investors seem to be hoarding cash these days.

    3. I read ZH, too.
      I’m not talking about theses HFs.
      They are just leveraged index funds.
      The good stuff people don’t know.
      Names like Paloma or Systematica.
      But they are single Manager offshore HFs not co fronted with regulatory burdens like UCITS conformity.
      I have a lot more to say about it. If you are interested, I can give some detailed, easy to understand insight without using fancy terms no one can understand. I won’t be able to leave out sarcasm, though. Let me know.

    4. Spoiler: It turns out it’s more of a rant, but I hope you can find the one or the other useful thing in it.

      Ok so let’s start with some very basic things:
      Most important: There are two ways to make money in the market. First is: You buy something and you sell it back at a higher price. Second is: You borrow something from somebody and sell it to someone else and then with that money you buy it back at a lower price from yet someone else, only this time you can buy more. Then you give that thing back to the person (the lender) you originally borrowed it from – You keep the additional quantity you bought and do what you want with it, either sell it or keep it for later. The second method I just described is called short selling. So to rephrase it: Either you buy low and sell high, or you sell high and buy low.
      There is no fucking other way to make money in the markets.
      This leads us to the second most important conclusion about the market participants: There is no distinction between speculators, traders or investors. None. I outlined above how to make money in the market, they all need to do the same thing. At this point I’d like to say “fuck off” to the differentiation by Benjamin Graham (Warrren Buffet’s Mentor) and while we’re at it “fuck off” Warren Buffet, too , because they are all the same: speculators. They and anybody else speculate that in the future they will be able to sell at a higher price whatever they bought now/in the past. Fuck these idiots.
      If you buy something at a price and the price goes up, you also have to sell it again, to realize your gain. Third most important thing: You need a counterparty who things that the price will go further in the direction you think it won’t. Read that again. In other words: You need to be able to off-load your position to someone who is willing to take more risk than you. If you don’t find that person, price will stall out, till you find again someone, maybe at a worse price then you originally got it. This gets us to the second conclusion: The market can’t be rigged or manipulated, for the manipulator needs to get out himself, too, in order to realize the gain. Consequently nor market participant is mean or has bad intentions. The only intention is to make money as outlined by the mechanisms explained above.
      Let’s get to Hedge Funds (HF):
      A fund which is not a HF disposes of much less possibilities in terms of what they can do. First of all a normal fund (also called long only fund) cannot go short (hence “long only”). This is the most important difference. Then there might me limitations on the use of “complex” financial instruments, such as derivatives. To bust a myth at this place: All you need in terms of financial instruments are options and forwards (all the other fancy stuff like knock out multiple reverse barrier converse rverse capital protection kick in goal blablabla are useless and in one form or another can be created manually by options and forwards).
      Another important difference is that a Hedge Fund can use leverage. This means that a HF can borrow money to buy/sell much more of anything than it actually has money (here I mean how much assets the fund has been trusted with).
      The basic premise of a Hedge Fund is: “Look guys, with your conventional long only funds, you are screwed, because when the overall market goes down, everybody is losing money, because all assets are under pressure. You should invest in us, because when the overall market goes down, we can short it and protect your capital.”
      So far this makes sense.
      The problem here is the following. As with anything in life it takes skill to make money in the markets. It takes skill to trade them. Modern Portfolio Theory (whatever the fuck that’s supposed to be) says that you have to have a diversified portfolio of equity and bonds and then all is going to be fine. This is just a dumb fucking lousy try to take out the skill element. Just buy and hold and it’s all gonna be OK.
      HFs tough are supposed to be active and have an opportunistic approach to the market. Why do I say active? Well, just from a pure mechanical perspective markets don’t go up in a straight line but more like in waves. Up 3 points, down 2, Up 5, down 2, Up 2 for example. Net Up: 6 points. Net movement: 14. Why not make money on all these moves? And that’s where short selling comes in handy.
      Thing is that if you are not skilled (yes people it’s not luck, it’s skill plus good money/risk management), you end up getting screwed.
      So Hedge Funds try to sell you the idea of a super-active super-opportunistic way of trading/investing, but nobody tells you how often they turn over their portfolio.
      A long only fund would have typically a turnover of 60% per year. Means that at the end of the year it has changed 60% of its portfolio. This number can be much lower though.
      I’d expect a HF to have big multiples of that, yet I haven’t seen any HF brag with their turnover. Because for their skill to be statistically relevant we would need to see a representative sample size. They don’t show it because they don’t have it. A long only fund can be judged after several years only, 4-7 years in particular. Imagine this, it’s a shitty performance, yet you have to wait for so long. I want to make money NOW…
      Both the Hedge Fund and the long only fund get paid for investing for you by getting a management fee.
      The HF gets a performance fee, additionally. Usually we speak of the “two and twenty”, where the Management Fee is 2% per year and the performance fee is 20% of the performance (Here usually investor individual performance depending on the moment of entry is considered, by a so called High Water Mark. I won’t go into detail, but it is a fair treatment for everybody).
      Here lies the real scam of a HF: The Fees.
      The problem is not the Performance Fee. It is the right incentive to do well, because all gains from performance fee by the fund are generated by gains for the investors. BUT: The Management fee… different story. Imagine you go into the bakery and just to enter, you pay 2 USD. Maybe they won’t have what you want, maybe they have it but it’s crappy quality, maybe it was advertised outside but not available anymore… you get the point. A HF tells you “well it’s to cover our expenses”. Wait a second, if the bakery wants to cover their expenses, what do they have to do? That’s right, produce something that sells, or in other words, something that performs, not by charging an upfront fee.
      In my view Management Fee should be zero, or even negative (we pay you for your trust). And the Performance Fee should be much higher like 30-50%. That would wipe clean all these fuckers.
      Now let’s talk about performance.
      Remember that the premise was in essence to produce a performance which is not correlated to the broad market (meaning an index like the S&P 500, the Euro Stoxx 50, MSCI World to name some important broad indices)? If you look at these indices from 2000 till today they kind of all look the same:
      A dip in 2001 (dot com bubble), a dip in 2007-2009 (Great Financial Crisis), a dip in 2011 (European Debt Crisis) and a dip beginning of 2016 (just some house cleaning if you ask me, but the doomsday people were crying for the end of the world…). Now, logically, a HF should not have ANY of these dips, no? They were uncorrelated to “the markets”, no? They were supposed to provide downside protection. Well they don’t. If you take a look at the HFRX (Hedge Fund Index) it looks like the S&P500 in a lower magnitude.
      Then the argument goes: “Well but we have a better risk adjusted performance than the broad market index”
      What is risk adjusted performance?
      In essence it says “how much performance you get for the risk that you have taken”. Sounds good but what is riks? And here is another big scam. Risk is measured by most HFs by volatility of their performance.
      Volatility in the market is nothing but the rate of change. Look at this: A car drives with 60km/h means that in one hour it covers 60km. That’s a rate of change. If a share price goes from 15 to 25 in one hour, that that’s a higher rate of change than if the same distance was covered in 24 months. Hence the volatility was higher. Where do we want a lot volatility? In the markets, because then we can make money fast. Where do we want a lot of UPSIDE volatility? In our portfolios or in a HFs performance.

      HFs love to brag with their measure of risk adjusted return and that is the Sharpe Ratio. They compare it to the broad market index and say (rightly so) that it is higher. Sharpe Ratio is: (Performance of the fund minus risk free rate) divided by the volatility of the fund’s performance. So if I divide a lot of performance by little volatility, I’m good. You might say: “Aww that’s cool I have a sharp ratio of 1.5, that means that for every percent of volatility I get 1.5% of performance!” Not so fast…
      But what was volatility again? Rate of change. Nobody was talking of the direction. If it was going down and up zig zag style or just downwards or upwards it’s all the same because volatility is neutral.

      What should we measure then?
      Answer Sortino Ratio: Here we go like this: (Performance of fund minus risk free rate) divided by DOWNSIDE VOLATILITY of the fund.
      So whats sortino ratio in words? – “How much percent of positive performance do I get for every one percent I lose in performance”. So if you have a Sortino ratio of 2 (which is pretty stellar) it means that if (over a certain amount of time) you lose 2%, you will statistically make back 4%.

      Guess what, HFs rarely don’t show Sortino ratio, they rarely advertise it. And it’s not that the fund isn’t doing better than the index. They are. BUT THE INDEX IS CRAPPY TO BEGIN WITH. And you can have the index via an ETF in by paying 0.15% per year all included!!!

      So yes HFs are expensive. They make little money because the markets currently make little money.

      Those HFs who make money are very few, they are led by skilled traders with a very good feeling for the market or by extremely strong pattern searching machines. The Hedge Funds which you refer to, Aaron see outflows because they suck at performance.
      There was a reopening of a Fond of Hedge Fund recently, capacity only 500 Mio USD. It took us 4 days to get it filled up.

      What sells best? Performance. Most don’t have it because they are not skilled. Making money in a bull market is easy. Making money in a bear market is also easy. Making money in no man’s land… It takes skill. And we are in no man’s land now. That’s why people hoard cash. They have (rightly) lost faith in Central Banks and governments. But the markets are still moving. The patterns are the same as they were 70 years ago. It takes skill. That’s it.

      As for the regulations: HFs which are set up in Luxembourg or Ireland mostly are conform with the UCITS regulations which imposes rules on how easy you can get your money back (how liquid they are) and what kind of instruments you can trade. The good funds are in Cayman Islands / Virgin Islands / Bahamas, etc., where nobody gives a shit about these rules. Problem is, you cannot promote them to Joe Average, because they have high minimum investments (250-500k to begin with and higher) and governments require the banks to make sure that you have a certain status of a professional investor for most of these offshore HFs. So again the good stuff is there, but it’s the little elite which is difficult to get into and trust me, they are fucking oversubscribed and have waiting lists.

      No so different from anything else in life I’d say.

      I’m sorry this became long and I haven’t covered even half of what there is to say. I know the beginning is some general rant, but I feel it is necessary. Feel free to ask anything, I’ll do my best to answer.

    5. Thanks for this extensive and insightful comment! My main takeaway is that the distinction between smart money (hedge funds) and dumb money (institutional investors/mutual funds) is too generous as many hedge funds are essentially in the dumb money category too. “2 and 20” seemed scammy, as it is just another example of the old “heads — I win, tails — you lose”, as all the risk is with the client.

      I have a few follow up questions:

      1) Where do the superrich who weren’t lucky enough to get into one of the better-performing hedge funds put their money? This is out of curiosity. I’m fully aware that I wouldn’t be able to make use of those investment vehicles as a non-UHNWI.
      2) This quite specific: in the US you have low-fee index funds like Vanguard that charge 0.15% or so, as you mentioned. But it doesn’t seem that there is a European equivalent. European funds I looked into charge significantly more for their “active management”.
      3) When you speak of “patterns”, are you implying that time series analysis is a required skill to have, or are you referring to macro trends, or something else entirely?
      4) What do you invest in privately?

    6. Aaron

      First of all I’m happy that my comment helped. I was afraid it was to much of a unstructured general write down.

      I have answers to all of your 4 questions.
      My fingers are itchy to start now since I’m passionate about all of this, but I have homework to do for my studies and I have to dedicate time to my private life, too. Give me some days and I’ll get back to you, promised.
      In the meantime a nice 500 page read about HFs: (first hit)
      https://www.google.ch/?gws_rd=ssl#q=more+money+than+god+pdf

      Bis bald!

    7. Your questions:
      1) Where do the superrich who weren’t lucky enough to get into one of the better-performing hedge funds put their money? This is out of curiosity. I’m fully aware that I wouldn’t be able to make use of those investment vehicles as a non-UHNWI.

      >>There are more superrich than there are 1. superrich knowing what’s good and 2. not well advised superrich. The majority of UHNW clients DID NOT make their money in the financial markets, but they a) inherited it or b) they made it in the real economy, i.e. building a company by producing goods and services which CREATE REAL VALUE to consumers.
      In Switzerland there are about five big banks: UBS, Credit Suisse, Vontobel, Julius Bär and ZKB. I work for one of them and we have quite a few UHNW clients. HNWI goes up to 80-100 Mio CHF or USD. Anything above is UHWI, typically a client advisor has a portfolio of 1-3 Billion with a handful of clients.
      Let me tell you: They are mostly fucking stupid.
      The HFs which are oversubscribed are not oversubscribed by smart people. They are oversubscribed because if they grow bigger, they “become the market” they are trading in and they’ll start moving it and so they won’t be able to get out when they need (I refer to manipulation in my previous post) Some markets are very small.
      That being said he rich don’t really know what to do in the markets, so they do what they know best: put it in private market. I read recently that the public markets are about 1-2% of the whole market. Meaning 98% is private. So private equity is where they put their money. That’s convenient for these fuckers for the following reasons: 1. Your money is blocked 7-15 years until some private equity firm starts paying you out. This is perfect because they cannot interfere with it and screw it up. Also grand children can’t spoil it. No market crashes, because assets are not quoted, no rumors and there, past performance actually is an indicator for future performance. Good managers do good jobs today and tomorrow.
      2. They know their field. Someone got rich by building biotech? He will invest there via private market vehicles. 3. You can easily delegate that to a family office who might have good connections to private market managers.
      Compare this with the usual asset allocation you get in a strategy fund: According to your risk profile you will have a mix of 5-85% of Equity and 5-85% of Bonds, some 5% liquidity via money market funds and 10-15% in Hedge funds or other alternatives. Now look at what I found on CNN:
      https://assets.bwbx.io/images/users/iqjWHBFdfxIU/ipCOTyvIBIwA/v0/-1x-1.jpg
      Just 18% equity and 12% bonds, only 8% Hedge Funds, a lot of cash (8%) and almost 40% in private markets and real estate. That’s awesome if you ask me. The 8% cash is for living and slowly the payouts of the alternatives part gives you steady income.
      It’s ok because private markets return like 12-15% per year if you look at multi vintage investments (Every year you engage into a new investment and slowly after the first capital call & investment period of approx. 7-8 years you start getting your payouts) over the last 20+ years.
      The equity part is just some sort of opportunistic liquidity management, since you get out quickly and easily.
      Personally I like private markets but the so called “liquidity premium” for the lock up of 8-15 years is just not enough. In numbers: The S&P 500 would have returned via an ETF approx. 9% per year over the last 35 Years. I can get in and out at any second so to say. Let’s give private markets 13%, that’s 4% more (= liquidity premium is 4%). It’s not enough for my taste. Good thing is though, if you are a fucking moron and tend to sell when it’s going down, instead of keeping the position and adding on to it as it goes down (and you know it’s a healthy industry and it’s all just panic), the Private Markets investments are good because they are not so correlated (still overall buying sentiment will be lower though, there is some spillover…) and you can’t get out.

      2) This quite specific: in the US you have low-fee index funds like Vanguard that charge 0.15% or so, as you mentioned. But it doesn’t seem that there is a European equivalent. European funds I looked into charge significantly more for their “active management”.

      >> Actually it’s not specific enough 
      There are two types of (index) funds: Classic Exchange Traded funds (ETFS), which are traded on an exchange so we speak of secondary market funds. Then there are primary market index funds (same structure as actively managed investment funds, but still replication of the index), where you buy shares (pieces of cake) from the investment company at “Net Asset Value” (NAV). Problem here is you can only buy once per day at a price unknown to you because of “forward pricing”. So you get today’s closing price of the stock exchange BUT YOU DON’T KNOW IT YET.
      Advantage of these primary market funds are the transaction costs. Usually you pay only between 1-2% to get your order placed, it’s called placement fee or issuing commission (the company (read the fund provider) issues shares to you).
      They are in general a bit more expensive than ETFs in terms of management fee (I think like 0.4% p.a. or so). There are not many of them.
      ETFs (secondary market traded) are quoted I think every 15 seconds and you can get in and get out just like you could buy and sell a share. So, just like for the primary market funds you need a broker (your bank or something like Swissquote or Interactive Brokers or Ameritrade). The thing is that the transactional costs are high for small volumes. But the fee you pay as management fee is between 0.07% and 0.45% depending on the instrument.
      Good providers are Vanguard, UBS and iShares from Blackrock. You should be able to buy them at your broker or your bank (hint: your broker will charge you much less transaction fee than your bank in general… who would have thought…) by just punching in the ISIN (International Securities Identification Number).
      Here is iShares:
      https://www.ishares.com/de/individual/de/literature/brochure/product-list-de-de-rc-brochure.pdf

      And here is UBS (just tell the website that you reside in Switzerland)
      https://www.ubs.com/ch/en/asset_management/etfs/etf-private/_jcr_content/par/tabteaser/columncontrol/col1/linklist/link_1036493668.1759168862.file/bGluay9wYXRoPS9jb250ZW50L2RhbS91YnMvY2gvYXNzZXRfbWFuYWdlbWVudC9ldGZzL2ludmVzdG1lbnQtdGhlbWVzL2ZpeGVkLWluY29tZS9ldGYtb3ZlcnZpZXctZWNoLnBkZg==/etf-overview-ech.pdf

      You referred to US vs. Europe. I mean, it’s not really important where the instrument is quoted (domicile makes difference in taxation, see below), but you should be able to buy pretty much anything. The issue is that not all instruments are being shown to you, because e.g. a PowerShares ETF domiciled in the US (ISIN Starts with USxxxxx) wil not have a sales authorization in your country. These are expensive to get and it’s only done, when there is a business case, i.e. enough demand. So maybe when you check out websites and you do so from certain countries, then you won’t see the whole offering.
      Should you not be able to open the above links (which are direct links to the pdf) then I can upload them on some file-to-link server or similar.

      Some considerations:
      a) If you have a problem at your bank, tell them you want to buy it on an “execution only” basis. Meaning that you do it without their advice.
      b) A little tax issue: If you buy an ETF which invests in mostly US equity (S&P 500, Dow Jones, Nasdaq, MSCI USA, etc.), make sure it is domiciled in Ireland (ISIN starts with IE), not in Luxembourg or Germany. Reason for that is that the US will keep parts of the dividend distributed to the fund as withholding tax, but since Ireland (contrary to Luxembourg for example) has a double tax treaty (“Doppelbesteuerungsabkommen”) with the US it can claim back a large part of the taxes. LUX can’t do that for US titles and over time it adds up.
      Same thing with predominantly German stock indices (Dax, Eurostoxx): Get a Luxembourg domiciled fund (ISIN starts with LU), they have a treaty with Germany.
      C) Make sure to trade it on an exchange where the spread (Price difference between bid and ask) is the smallest. Many ETFs trade on several exchanges. Take a look at this, too.

      Synthetic vs physical replication:
      The index is replicated by the ETF either by actually buying the shares and holding them for you (physical replication), or synthetically.
      Synthetical means that, for example: The Fund provider (i.e. iShares) goes to an Investment Bank, let’s say Societé Génerale (SocGen) and tells them:
      “Hey, please, I want the performance of the DAX, but buying the shares in it and holding them is expensive, do you have a solution?”
      SocGen says: “Sure, just give us the invested assets of your clients, we like hard cash, because we can make more of it. In exchange, we will give you the performance of the index minus a bit of fees, but still better than you buying them”.
      iShares: “Yes, cool, but then I have you as a counterparty risk, how do I get insured?”
      SocGen: “No problem, we will give you a basket of blue-chip equity and bonds which we make sure that it is always valued 105% of what you gave us. We will put this basket in the hands of an independent custodian (mostly it’s a company called State Street) who will get a tiny tiny fee and you will be declared the factual owner of it, so we cannot use it in case we go bankrupt.”
      iShares: “What do I do from the returns of that basket?”
      SocGen: “Oh, you just give it to us, in exchange for the index performance we are giving you. We SWAP the performances”.
      Deal.
      Sounds familiar? SWAP BASED Replication? That’s how it works. Now, in general swap based is a bit cheaper than physical replication but you have to choose if you are comfortable with this construction. Only thing to check with synthetic is if the fund provider, and so you, too, really factually owns the basket. (The German differentiation is “nur Besitzer, oder tatsächlich Eigentümer?”). That’s important in case the Investment Bank you make the swap with goes bust.

      3) When you speak of “patterns”, are you implying that time series analysis is a required skill to have, or are you referring to macro trends, or something else entirely?

      >> I think Medallion Fund is a great example of that. Please read 285 ff. from “More Money than God” in the link in my previous post. Here a nice quote:
      “In one simple example, the brain trust discovered that fine morning weather in a city tended to predict an upward movement in its stock exchange. By buying on bright days at breakfast time and selling a bit later, Medallion could come out ahead— except that the effect was too small to overcome transaction costs, which is why Renaissance allowed this signal to be public.”
      Also, on a funny note:
      “A scientist volun¬teered to help Simons write a program to figure out the seating plan; he would assign probabilities to which sorts of people would get along best with which others, then let the computer optimize the table settings. For a while the blackboard in Simons’s office was covered with estimates for the likelihood that a single female algebraic geometer would get along with a married male judo instructor, and so on. When the big night arrived, the program seated one of Renaissance’s long-time investors next to a woman he may have liked too much. She had sued him for sexual harassment.”

      Personally, when I trade my stuff I also trade patterns, but I have gotten used to the way the FX charts move. So there are patterns but it’s a lot of feeling, too I think.
      As for macro trends, this is (to me) a BS term. Trends are trends and nobody cares if they are macro micro, event driven or what the fuck else these dumb fucks in finance talk about. Know this: Whatever happens in a market, there is an orderbook and any intention which is expressed through either buying or selling has to “eat through” that order book and the respective orders. There ARE technical levels, denying it would be stupid. Most of them coincide with round numbers like 50 and 00, because it’s psychological. You sell your car at the second-hand dealership (secondary market… over the counter… sounds familiar?) for USD 40k or for 45k, not for USD 41’234.72.

      The skill is in seeing them, then having a trade plan, and also accepting that some patterns on higher timeframes are stronger, and that sometimes you are wrong and you have to let go of your position.

      4) What do you invest in privately?

      >> I’ll be frank with you. I’m 26, working and studying and I live a life where I do not have to look at prices in Swiss supermarkets. Besides that, I’m what one would call poor.
      I do trade my Forex demo accounts, and I am seeing progress after 5 years of dealing with this, 2 of them more extensively, especially the last half year as well as some recent work with a psychiatrist. Trust me whatever you are as a person, your performance chart is a reflection of your deepest and most frightening demons you have inside you – your pain, your hate, your fears, all you have gathered in your childhood. Your self-destructiveness will manifest in your trading. I think Mark Douglas said: “Your mind will always look for a way to express itself”. But it’s getting much better.
      I don’t have any investments anywhere besides some physical gold, but it’s of a symbolic amount.
      I find all funds lame. 5% per year? I need 15% per week. With Forex and with leverage it’s possible, I have made 200% this week only. Started with USD 1’000 and I’m at 3k+ atm. It’s a demo because I don’t feel secure enough to do it in real time. Also, I have restrictions from work (ridiculous holding period of 7 days for FX. Fuck me, I’m in and out in minutes sometimes…) and as to where and how I should operate with my money, too.
      I have zero trust in funds, I have zero trust in the managers. I wouldn’t trust them money, ever.
      My girlfriend works in private markets, there both me and her see more potential, but what am I supposed to do with 15% per year, when I don’t even have 5k to invest.
      So, the plan is to get better at trading (I am getting better, but it’s a slow process, yet worth it) and then get out of banking, find a quiet place maybe for the city or for the state and trade with no restrictions. I can’t be bothered to play that corporate tricks game and climbing the ladder my whole life, I want to raise a family, too. People ask to often how they can make money. I’d say it has to fit into your private life.
      I’m sorry if this is a disappointing reply for you, it’s just that I want to be honest with you.
      There are great places, maybe even great funds to put your money in, the thing is that it is too slow for me. You could look into some trends like aging, urbanization, security or robotics (Pictet Asset Management has a fund for each of the last), but then again, show me some vehicles which make 250% per year, then OK. But these lousy 3-8% per year… no thanks. My hope is that social trading will become more serious. Etoro (shady as shit) is launching a fund-like platform, which has a very simple infrastructure to copy trades. This is the future. It will crush the fund industry with old heavy structures like the fund provider, custodian for the fund’s assets, custodian for the client’s assets, transfer agents…. Geez it all costs moneys and is inefficient. It will come, serious providers will set up shop and then let the fun begin. Performance fee only and let the best win. Can’t wait for it, I’m telling you.

      Again, I do realize that there are many points (in particular on ETFs) which I did not cover. I purposely left out currency hedging, since this is to some extent a technical and philosophical issue.
      Any other questions are welcome.

      Cheers

    8. Thanks again! Would you mind if I contacted you privately under the email address you use on this blog in order to continue this conversation?

    9. Sure, no problem.
      Just take another address. Please use:
      [REDACTED]
      Achso, wenn dir Deutsch lieber ist, dann geht das natürlich auch^^
      Cheers

  5. Off topic – just a quick holla at Cani. Glad to see you still around, mate. You helped quite a bit in the forum a few years back. Hope you’re well!

    1. Hi Roy,

      Thanks, I am glad that I could help. All is well, just been busy with my new career. Plus I have said practically everything I wanted to say on the forum.

      Keep chilling!!

  6. Automation in finance has been going on a long long time. There have actually been a few strange stock results attributed to automation. (something about a saw line or something).

    That near Wallstreet they bought up housing that was closer to the internet cables so they could get a few milliseconds more time to react should tell you enough.

    1. That kind of trading requires you to do things vaguely similar to scalping the market for the lack of a better word. But they are quite harmless in the grand scheme of things. Also, most high frequency trading firms don’t make money.

  7. I too used to work in financial services. I don’t want to mention specifics though. I am suspicious of some of the things being said here. Although they have some comedic value. Do you actually work in finance or just read a lot about it to know some things.

    The statement that it should only be a performance fee only hedge fund structure going forward is a bit off. Because the performance fee in it self is the problem. Especially when everyone else including index funds charge management fees however small they maybe and not performance fees. I won’t also agree with that statement that it should be a skill based performance fee. Because what skill are you talking about. Patterns recognition?

    As you may know investing/saving money is an essential part of living comfortably for a lifetime or for several generations in the face of inflation. So, if it required skill of that much huge levels as you advocate all of us will be screwed. Besides what tells that the 20+ year great performance of a certain money manager can’t go to shit in a second. So what we need is not more gambling(i.e. skill) but the ability to stick to a SCIENTIFIC PROCESS. Stop others from stealing (i.e. from insider trading etc.) and agree that the markets are really what it is, RANDOM.

    I understand if a child said he wants a 250% per year return.

    Things I do agree with the above are the following.
    It is mundane at best to archive tiny returns only to retire at 60 by which time your legs won’t work anymore to do the things you always wanted to do with yourself when you retire. But the only way to gain big returns is to take on high risks. For a guy in his 20s, its okay to think about more risk than less of it provided that everything else fall in place to take in more risk as well.

    Second, I agree with that fact that PE is a type of god in the investments sphere. I certainly like to pray to it/him/her.

    I would also have to say saving more money per month is more important than any big return you get per month.

    1. Omg… I can’t take it. I have to got through your post.
      You make claims and bring zero arguments:
      “The statement that it should only be a performance fee only hedge fund structure going forward is a bit off. Because the performance fee in it self is the problem. ”
      WHY?
      Aha according to you it’s because:
      “Especially when everyone else including index funds charge management fees however small they maybe and not performance fees.”
      Huh? Because of the others? So we are not supposed to do it because it’s industry standard?…. It was industry standard to lend to NINJAs (No Income, No Job, No Assets)for acouple of years, too. Mortgages and stuff. I’m sure you remember.
      “I won’t also agree with that statement that it should be a skill based performance fee.”
      And we should base it on what if not skill? it’s called PERFORMANCE fee. Performance comes from skill, not luck. Just like in sports.
      “Because what skill are you talking about. Patterns recognition? ” YES! YES! YES!
      Geez, look at a chart and tell me you can’t see that the same stuff is happening over and over again.

      “So, if it required skill of that much huge levels as you advocate all of us will be screwed.”
      WHY?

      ” Besides what tells that the 20+ year great performance of a certain money manager can’t go to shit in a second.”
      And Hussein Bolt is going to run the next 100metres in 5 minutes, right? About the same probability.

      “So what we need is not more gambling(i.e. skill) but the ability to stick to a SCIENTIFIC PROCESS. Stop others from stealing (i.e. from insider trading etc.) and agree that the markets are really what it is, RANDOM. ”

      OK you’re one of the “the market is random”-guys. Also when did skill become gambling?
      Wow… I mean, I know when I’m of of a trade. That’s all I can tell you. And I know it in advance. Before putting it on.

      “I understand if a child said he wants a 250% per year return. ”
      Look at my screenshot. It’s much more than the childish 250%.
      http://prntscr.com/cyft0i

      “But the only way to gain big returns is to take on high risks.” Wrong. It’s not about the risk. It’s about the risk-to reward that you can expect of your trading style over a large samplesize based on how you are able to see the market. And that my friend depends on if you are at peace with yourself.
      5 Years it has taken me to produce a result like the chart above. 5 Years, And I know I can do far better than that. Because I’ve come a long way to state the tings that I stated.

      Peace

  8. I think the first jobs to go away won’t be financial analysts but drivers. There is so much money spent of automating driving that its not even funny how much is spent on financial analysis automation.

    There is a sense of shared economy of the future when you here someone tell that robots are coming for you that is thrown in with itself. But spend a little more time researching that field and you’ll realize that we are going in for a more unequal (not that it is bad necessarily) money based society than a communist utopia. Social stratification will be much higher than today.

    Besides, not everything can be shared.

    1. Then be a genius and do the same on a demo account. Same samplesize same timeframe same profit factor.

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