◼ FINANCE20
● U.S.regulatorsconsiderrulesthatcouldput
indexfundsunderantitrustscrutinyThe Funds That
Owned Too Much?
Since index funds became widely available in 1976,
they’ve upended the business of money manage-
mentandmadeinvestingforthemasseseasier
andcheaper.They’vealsohadanunexpectedside
effect: Because they’re so large, index fund fami-
lies are among the top shareholders in many com-
panies, including those that compete with one
another. Despite this, funds’ share purchases get
no review from antitrust regulators.
That could change under an initiative by the
U.S. Federal Trade Commission—possibly radically.
Two proposals could result in investments by all
the giant mutual fund families coming under scru-
tiny for the first time from both the FTC and thefounder of rival platform QuantConnect, which
makes money by selling its product to financial
institutions and running a marketplace where
users can offer their algo strategies to anyone who
wantstobuythem.Crowdsourcinglivesonthere
andatotherplatforms.Numerai,whichrewardsits
userswithitsowncryptocurrency token, probably
comes the closest to Quantopian’s vision.
Professional investors can’t gloat too much.
Hedge funds in general are hurting—they’ve
lagged the S&P 500 by 62 percentage points over
fiveyears,HedgeFundResearchdatashow.And
quantinvestingingeneralisfullofpitfalls.One
isthatbacktesting can unearth a lot of random
signals that don’t have anything to do with why
a stock went up or down—they might appear to
have predicted moves in the past but won’t in the
future. As the availability of data makes it easier to
try out hypothetical strategies, investors tend to
pick up more of this noise. In a 2016 paper, four
Quantopian employees found that the more back-
testing a quant did, the bigger the gap between the
reported results and the real-world returns.
All quant investors are racing against a mar-
ket in which the best strategies quickly become
open secrets. The democratization of technology
and data makes it easier for people to get started,
says David Khabie-Zeitoune, CEO of GSA Capital,
a quant hedge fund. “But against that you have a
stronger force, which is that there are so many peo-
ple trying to do this,” he says. “It has never been as
ferociously competitive in quant markets.”THEBOTTOMLINE Technologyis democratizing markets, but
that doesn’t make it any easier to find great trading strategies,
because the competition is getting tough.U.S. Department of Justice, which share antitrust
enforcement. It’s the index funds that appear to be
causing regulators the most heartburn. Just three
companies—BlackRock, Vanguard Group, and State
Street—manage about 80% of all indexed money,
and together their portfolios own more than 20% of
the typical S&P 500 company. The Vanguard Total
Stock Market Index Fund just became the first stock
fund to hit $1 trillion in assets.
Some antitrust enforcers and academics believe
that common ownership—when one institutional
investor is the largest holder of shares in companies
in the same industry—is subtly tamping down the
competitive forces that motivate companies to gainJames Veitch, a 20-year-old computer science
student, hopes to one day join the competition,
and he’ll have Quantopian to thank. The intern at
hedge fund Balyasny Asset Management says he
first learned to code by editing other people’s work
on Quantopian and ran more than 30,000 back-
tests over four years. Already, he’s mastered the
ageless rule of hedge funds: Asked about some of
hissuccessfultradingideas,he declined to elabo-
rate.Amateurscancrowdsource. Pros keep it to
themselves. �Justina Lee▲ Fraticelli