If you have never witnessed the formation of a bait ball, it is a sight to be seen. To protect themselves against predators, thousands of fish come together and create a gigantic gyrating ball. It is majestic and at times seems to take on a life of its own. The idea is a simple one. Safety in numbers. Any deviation from the ball is asymmetrically penalized. This doesn’t guarantee survival, of course, but for a solo fish, remaining inside the ball is the best chance they have.

School of fish PX

For predators, however, it is a feeding frenzy.

This, I would argue, is a good analogy to describe the opportunity facing active managers as larger swaths of the market are held by passive and quant-driven strategies. Even though the move away from individual stock selection and active management has been completely rational from the perspective of individual investors, like the formation of a bait ball, this behavior in aggregate has created opportunities for those of us on the outside looking to take advantage.

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