Ex-Marine with a penchant for math is now fighting to win converts to an investment approach that replaces humans with algorithms.
FORT INDIANTOWN GAP, Pa. — It was 9 p.m., and about 60 financial executives chattered nervously outside a barrack full of bunk beds at this U.S. Army training post in central Pennsylvania.
They had come from New York, Toronto, Philadelphia and beyond at the behest of Wesley Gray, an investment manager and former Marine Corps officer, to trek 28 miles through the mountains. The truly motivated would lug 30-pound packs.
“We are here to march for the fallen,” Gray shouted, describing the next day’s hike as a “haze ex,” Marine jargon for a hazing exercise. He distributed dog tags of soldiers who had died in battle, ordering that they be worn on the march.
Career: Marine Corps officer; Drexel University professor; founder of Alpha Architect, which manages $700 million for pension funds and wealthy families
In the cultlike world of machine-driven, systematic investing, chasing the latest philosopher king up a mountain counts as just another day at the office.
Gray runs a $700 million asset-management firm and has published three books about his conviction that quantitative investing is superior to the human variety.
He has attracted an intense following among billionaire investors, pension funds and exchange-traded-fund junkies who reject the old Wall Street way of mutual and hedge-fund managers charging steep fees for mediocre returns.
That Gray, 37, was once an embedded adviser to the Iraqi army, works out of a garage in suburban Philadelphia and uses the Marine Corps motto Semper Fi to sign off on emails has only added to his mystique.
With its reliance on trading algorithms that replicate a wide range of investment strategies, Gray’s firm, Alpha Architect, represents the knife edge of perhaps the biggest trend in finance today: the replacing of humans with machines and models. He is up against some of the world’s biggest financial institutions, including the likes of BlackRock.
Since his days studying finance in college, Gray has been trying to devise computer models that can unearth stock-market winners more efficiently than fund managers.
The explosion in popularity of exchange-traded funds, (ETF) which track market indexes while trading like a stock on a public exchange, has allowed him to put his theory to the test.
So, instead of a retail investor scratching his head over which fund manager might be best at picking value or growth stocks, Gray is touting his own fleet of ETFs that provide maximum exposure to these investment “themes” on the basis of his computer models. While traditional ETFs track indexes, a new breed has a different goal: using machines to replicate what traditional fund managers do, minus the high fees and unreliable performance.
“Everything we do is based on how we get rid of the human and how we program instead,” Gray said.
By design, Gray’s funds are volatile. His algorithms target stocks that appear deeply undervalued or poised for explosive growth. Those are the same types of stocks that tend to be susceptible to violent price movements.
His four funds’ records are mixed. An international value fund returned 30 percent over the past year. A momentum fund, though, was up 9 percent during the same period. By comparison, the S&P 500 index is up about 16 percent.
The September trek was organized by the Pennsylvania National Guard to honor fallen soldiers. For the past two years, Gray has used the event as a venue for like-minded investors to gather in an unconventional setting.
At 8 a.m. on the day of the hike, Gray was among a swarm of about 500 civilians and enlisted soldiers pushing up the mountainside. His group included a few clients and a collection of investment advisers and ETF specialists who, beyond their shared interest in high finance, wanted to see if they could keep up with Gray. There were also several job applicants whom he was judging for mental toughness.
Gray was walking briskly, and he bore his 40-pound pack with a soldier’s ease.
He is a compact, wiry man who wears his hair military-style short. He livens up long riffs on efficient markets theory with persistent profanity. In contrast to his interviewer, his conversation was not interrupted by heavy breathing.
Growing up on a ranch in Colorado, Gray had a gift for numbers as well as a desire to serve his country.
In 2004, two years into a finance doctoral program at the University of Chicago, Gray enlisted in the Marines and became a ground-intelligence officer. In 2007, he spent eight months fighting with Iraqi soldiers in western Iraq, an experience he detailed in one of his four books.
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He left the Marines in 2008 and eventually landed a job as a finance professor at Drexel University. His academic writings focused on themes such as whether hedge-fund managers are any good as stock pickers (the answer, Gray concluded, was not really).
In 2011, he fielded a phone call from Edward Stern, the son of billionaire investor Leonard Stern. The younger Stern was responsible for investing the family fortune, and he had grown frustrated with humans as investors, having seen firsthand the losses his fund managers had racked up during the financial crisis.
He was taken with Gray’s musings about building computer models that, in theory, would be cheaper and more efficient than paying high fees to a fallible hedge fund hotshot.
“He opened my eyes to systematic, quant, get-the-human-element-out style of investing,” Stern said. “It made a lot of sense to me.”
After a few years of consulting with Stern, Gray persuaded him to seed a fund that would deploy these strategies with $20 million.
Today, Gray’s fund manages just over $700 million on behalf of pension funds and wealthy individuals and families.
Gray still works out of his garage. There are now seven employees, four of whom have military backgrounds — including a Navy pilot, a combat engineer from the Army and one other Marine.
He is holding true to the sell-your-brain, not-your-product philosophy that got him started as an investor — churning out books, papers, blog posts and tweets.
While he has attracted sophisticated institutions and multimillionaires to invest in his main fund, it remains unclear how successful he will be at persuading smaller (and less knowledgeable) investors to purchase his ETFs.
His largest fund, U.S. Quantitative Value, launched in 2014 and still has assets of just $74 million, making it a minnow compared to other multibillion-dollar ETFs
“They are not for everyone,” said Ben Johnson, an ETF expert at Morningstar and a participant in the march. Indeed, Johnson said, referring to the volatility of Gray’s funds, “you have to be willing to have your face ripped off from time to time.”