What I Learned This Week

Will the "black boxes" cause the next financial crisis? Risks are mounting as the algorithmic revolution in asset management accelerates.

Estimates paint a portrait of inevitability: algorithms will rule markets. According to Bloomberg News, within 10 years, passive giants Vanguard and Blackrock will manage over $20 trillion combined, up from $10.7 trillion today. Meanwhile, Man Group Plc’s CEO Luke Ellis has predicted: “Machine learning could be involved in 99% of investment management in 25 years.” Given 2017’s unprecedented escalation of financial industry disruption, it is easy to understand why the reign of algorithms appears preordained. Passive strategies and quant funds took in record flows. VIX strategies, cryptocurrencies, and ICOs dominated financial headlines—all products undergirded by algorithms. Yet, the more p…

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