The US Investment Olympics: Smart Money, Crowd Intelligence, and AI


Welcome to the Qualifying Round of the 2022 USA Investment Olympics.

The goal of the games is simple: beat the S&P 500, either by generating higher returns or by playing dirty and seeking higher risk-adjusted returns.

Let the Games begin!

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Like the 2022 Winter Olympics in Beijing, the US investment Olympics are not easy to categorize. Mutual funds are automatically barred from participation: their fees are too high for them to have a realistic chance against the S&P 500. Hedge funds have even higher fees and should theoretically be hedged, so nor can they compete with the stock market. In fact, the only securities capable of matching the index are exchange-traded funds (ETFs).

To date, there are eight ETF contestants representing three themes:

  • Smart Money (GVIP, GURU, GFGF and ALFA): These ETFs mimic the trades of famous investors and hedge and mutual fund managers. Its tone is high alpha at low rates.
  • Crowd Intelligence (BUZZ and SFYF): Stocks are selected based on the wisdom and sentiment of the crowd.
  • Artificial intelligence (AI, AIEQ and QFRT): The stocks in these ETFs are picked by AI programs. In the case of AIEQ, the famous one from IBM Big Watson makes the elections

Although less expensive than mutual funds or mid-hedge funds, ETFs have fees of 64 basis points (bps) and are not cheap compared to low-cost index trackers. But then again, top-notch performance doesn’t come free.

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Despite their contemporary themes, our ETFs have yet to resonate much with the investment community. Its accumulated assets under management (AUM) are only $700 million, although some have a track record dating back to 2012. But then again, who doesn’t like cheering on the underdog?

AUM of Smart Money, Crowd Intelligence and AI ETFs, in US millions

Chart showing Smart Money, Crowd Intelligence and AI ETFs: Assets under management, millions
Source: FactorResearch

Smart Money, Crowd Intelligence and ETF AI: Performance

So how did our eight ETFs fare against the S&P 500? We created equally weighted indexes for all three groups, with a history of Smart Money dating back to 2012, AI to 2016, and Crowd Intelligence to 2019.

Because they all invest in US stocks, they all performed in line with the S&P 500. Some have beaten the benchmark at times, but not consistently. The judges are not particularly impressed.

Beating the S&P 500: Smart Money, Crowd Intelligence and AI ETFs

Chart Showing Outperformance of the S&P 500: Smart Money, Crowd Intelligence and ETF AI
Source: FactorResearch

Of course, the Olympics, like finance, is all about data and details. Looking at an investment’s chart is not a particularly scientific approach to performance evaluation. The judges want to know what kind of alpha our competitors have generated since their inception. Smart Money produced negative alpha of -3.0% per year since 2012, Crowd Intelligence -7.2% per year since 2019, and AI -0.9% since 2017.

A cynic might say that the smart money isn’t that smart, the crowd isn’t that smart, and the AI ​​isn’t that smart.

Alpha Generation: Smart Money, Crowd Intelligence and AI ETFs

Chart showing Alpha Generation: Smart Money, Crowd Intelligence and ETF AI
Source: FactorResearch

Better at risk management?

But before we eliminate all of these contenders from medal contention, our judges examine their risk management characteristics. Our ETFs may not have the longest track record, but they all experienced the last severe stock market shock: the COVID-19 crisis. So how did they do it?

Smart Money and Crowd Intelligence fell more than the S&P 500 in March 2020, while AI improved marginally. Maybe humans are overrated and AI is better at risk management?

Less inconvenience? Maximum provisions during the 2020 COVID-19 crisis

Chart that shows fewer drawbacks?  Maximum provisions during the 2020 COVID-19 crisis
Source: FactorResearch

While lower drawdowns can help investors follow an investment strategy, on their own, they are not particularly useful metrics. After all, cash would also outperform in a bear market, but is unlikely to beat the benchmark over time. Thus, judges resort to risk-adjusted returns and the Sharpe ratio.

AI beat Smart Money and Crowd Intelligence, but none of our contenders generated higher Sharpe ratios than the S&P 500. That means none of them qualify to advance.

Better risk-adjusted returns? Sharpe ratios, 2019-2021

chart showing better risk-adjusted returns?  Sharpe ratios, 2019-2021
Source: FactorResearch

Additional thoughts

Although these ETFs had different flavors, they showed similar behavior: in fact, they all outperformed the S&P 500 in 2020. The question is why.

A factor exposure analysis reveals that they have almost identical exposures: negative exposure to value and positive exposure to the size and momentum factors. All of our competitors were overweight, outperforming small-cap growth stocks.

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Smart money investors like hedge funds may not appreciate that the crowd is taking the same risk exposure as they are. And everyone may be surprised that AI ETFs are too.

The right factor exposure can help beat the S&P 500 over time, but it’s nothing like alpha. In fact, it is the world’s investing equivalent of doping. Especially when hidden within themed products.

Although it would not have mattered in this round, it would have been grounds for disqualification.

So far, the S&P 500 is gaining ground.

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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.

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Nicholas Rabener

Nicolas Rabener is the CEO of FactorResearch, which provides quantitative solutions for factor investing. He previously founded Jackdaw Capital, a quantitative investment manager focused on equity market neutral strategies. Previously, Rabener worked at GIC (Government of Singapore Investment Corporation) focusing on real estate across asset classes. He began his career working for Citigroup in investment banking in London and New York. Rabener holds a master’s degree in management from the HHL Leipzig Graduate School of Management, holds the CAIA charter and enjoys endurance sports (100 km Ultramarathon, Mont Blanc, Mount Kilimanjaro).

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