The Cambrian explosion has nothing on institutional
In the former, half a billion years ago, the complexity of
life increased by orders of magnitude over millions of years.
Institutional investings journey from small and simple to
enormously complex took only half a century.
Many benefited from this veritable explosion, as detailed in
this 50th-anniversary issue.
Businesses, especially those with less-than-stellar credit
ratings, owe a debt of gratitude to Michael Milken the
man who contributor William D. Cohan profiles here and who has so successfully
reinvented himself after a two-year prison sentence following
the excess of the 1980s.
Start-ups and dreamers, in Silicon Valley and worldwide,
have ridden the wave of greatly expanded venture capital and
private equity an industry profiled by Jess Delaney in
our May print edition and one whose future will be as
interesting as its past.
Perhaps most of all, asset allocators the world over
benefited endlessly from a growing range of investable options
that went from absolutely basic to the exact opposite an
evolution detailed in this month's issue of Institutional
And not least, there are those who manage other
peoples money for a fee. In 1982, the inaugural Forbes
400 list of wealthy Americans contained just one person in the
top 100 who made his money that way: Warren Buffett, at No. 92
(and even that was a stretch, as Buffett had stopped managing
other peoples money for a fee long before). In 2016,
counting just those who could be said to have gotten wealthy
via fee-based money management, there were 12: George Soros,
James Simon, Ray Dalio, Carl Icahn, Abigail Johnson, Steven
Cohen, David Tepper, Stephen Schwarzman, John Paulson, Ken
Griffin, Edward Johnson III, and Bruce Kovner. A number of
these individuals along with a litany of other
financiers, academics, politicians, allocators, and villains
made the Institutional Investor 50, our list of the most
impactful (good and bad) individuals in institutional
investment over the past five decades.
And yet for all structured products, junk bonds,
derivatives, risk measures, alternatives, hedges, and swaps
that have sprung up since Gil Kaplan founded this magazine in
1967, the underlying goal of institutional investing is almost
entirely the same: Companies need capital; allocators demand
return on capital. Investment bankers act as the grease; asset
managers, I daresay, are either reliable stewards or degenerate
gamblers. This Rube Goldberg machine that is the financial
system, despite its ludicrous complexity, still does the same
thing it did 50 years ago.
The unfortunate and ironic part is that all this innovation
has done little to quell crises. Economic collapses occurred
before the institutional investing Cambrian explosion, and they
happened after. For every tulip craze, Charles Ponzi, and Great
Depression, the past 50 years have seen just as many housing
bubbles, Bernie Madoffs, and economic downturns. Underlying
every instance of disaster is the same root: We simply do not
know what we think we know.
Which is why the most recent craze in institutional
investing leaves me lukewarm. In March, BlackRock announced
that it was reorienting many of its active equity
strategies toward a computer-driven, quantitative approach.
Firms such as James Simons Renaissance Technologies have
been relying on computer-driven returns for more than three
decades, and BlackRocks move all but makes quantitative
investing the default. Out with the green eyeshade, in with the
monotonous drone of server farms.
The problem is that the laymen and, relative to the
James Simonses of the world, we are almost all laymen
must put blind faith in computers. No matter how smart, no one
outside Renaissance Technologies understands what is in its
black box; the few outside investors that remain simply must
hope the box still produces, and collect their returns when it
BlackRock isnt becoming Renaissance, of course. Yet
the firms plan of harnessing the power of human and
machine to efficiently and consistently deliver investment
performance is, at its core, a denunciation of the human
brain. Peter Lynch the great mutual fund manager of
Magellan Fund fame recently told me, An investment
needs a story. Explaining why you expect an investment to
go up or down is an essential step for an investor, he said,
even if youre right only 60 percent of the time.
Now, instead of Lynchs homespun narratives, we will
increasingly hear one phrase: Because the computer said
so an admission, at its core, that we dont
I was born the same year as Renaissance; I am more than
ready for self-driving cars, robo-advisors, and augmented
reality. I believe wholeheartedly in the positive message laid
out in the first sentences written in Institutional Investor by
our founder, Gil Kaplan: The management of money is one
of the oldest of the arts and one of the newest of professions.
As a profession, it is changing continuously, so much so that
it bears little resemblance to the same field only a generation
But we must not mistake complexity for certainty. We will
face more crises, more Ponzis, more crazes, all the result of
not knowing what we thought we knew.
It will be up to humans, not algorithms, to dig us out.
Kip McDaniel is the Editorial Director and Chief Content
Officer of Institutional