Will it Ever Be a Stockpicker's Market Again?

Public Markets Blackpills & Whitepills

On the other side of “the Blackpill” (defined as a harrowing, dark realization about something that was otherwise perceived as anodyne) is that although it is dark, it is often one side of a Blackpill/Whitepill synthesis. It’s something that you add to your mental model of the world. A teachable moment. This comes in many forms when dealing with the public markets. Classically, the public market Blackpills sound resentful, like “I should have full-ported TSLA in 2012 like my dumbass neighbor and become rich” or “I spent 70 hours a week on work to underperform the SPY for the past 15 years”. There’s nothing really to learn there, other than “yes, I should have performed better!”, so they’re not really lessons to dwell on— you should always be trying to improve your process. There are some Blackpills, however, that run deeper than just performance. Some speak to the evolution of market structure since the buttonwood tree. Others are more people and career focused.

For example: the private markets boom has been great for all involved. VC/PE/RE and even private credit. Middle-intellects at the right firms are getting paid >$1M to babysit funds that don’t need to be marked-to-market for another 7 years. They got in on the ground floor and will be golfing for the final 25 years of their careers vs. the first 15 years spent sweating all-nighters. Meanwhile, in public markets, active managers have been corralled into either a cortisol-spiking pod shop career, or forced to glom on to the marketing expertise of a single manager who hasn’t outperformed in 15 years. The better life bet at any point in the past 15 years would have been to ditch the public markets entirely and get involved in privates early, even up to and including the 2021 boom/bust. Lots of career mileage could have been chewed up just toiling away in public markets that would have been rewarded 2X in the private markets arena. It’s a dark realization for many!

So what’s the Whitepill antithesis to this Blackpill? If you’re still in the public markets game it means you probably really love the game. Or you have no other skill set and you’re suffering from Stockholm syndrome. It also means that 15 years worth of talent has fled the public markets buy-side in favor of an easier path in private markets. And the sell-side has been hollowed out, meaning that whatever value they might be adding to market efficiency/idea generation has been gutted as well. I tell people at kids’ birthday parties that my superpower is looking like an idiot for long periods of time and not being embarrassed. I think that’s still an edge. Most would be embarrassed to be talking about H&R Block’s moat, or something.

The prestige is at the larger scale operations in public markets. It takes something like $1B in AUM (and a full-time IR team) to get a quant hedge fund off the ground. You need talent, you need data feeds, you need to pay the sell-side something, and you need to be able to offer generous upside if things go well. This is why all quant teams live at HFTs or multi-managers. Much easier to just centralize that stuff. The quality of life is just better. These teams prize liquidity more than anything; to paraphrase Jim Simons, “if it’s liquid, tradable, and has data, we’re involved”. Another Whitepill: go where there’s no liquidity, no market-depth-monitor data, and maybe where there are some impediments to trading!

The synthesis here is that this stuff, single manager vs. multi-manager, quant vs. traditional L/S, smooth vs. lumpy returns— it’s all cyclical in my view. The preceding 25 year period leading up to and through the global financial crisis was an era for single managers. Guys like John Paulson, Steve Eisman, and Michael Burry made their bones and monetized that reputation. Even if the staying power wasn’t there. The recovery from the GFC is what we’re reckoning with now; passive indexes have too good of a track record vs.any and all long-biased funds. Any allocation that has or had >0 beta got moved into VOO, and any allocation that wanted to avoid beta got moved to Citadel/Millennium or private markets.

Allocators will always fight the last battle, in this respect. They are the ones who are behind the rise of pod shops. They demand smooth return streams from the public markets with no correlation to anything; this is so easy to paper over/provide in the private markets. So don’t expect there to be renaissance into long-bias single-manager strategies that focus on illiquid and idiosyncratic risk any time soon. Allocators are not a class of enterprising people. But the ones that do care about better absolute returns will be the vanguard of the cycle. There will be a flows-cycle from the current barbell market structure of index/multi-manager, to something more balanced. The trick is to survive long enough to participate in that cycle!