Posted by jsomers 14 hours ago
there will also likely always be more. in the limit in order to get an edge your model would start to infer insider information. for example, it's common knowledge by now that satellite imagery is used to measure car numbers in parking lots, that's a proxy for insider information.
so it's not even so much the model as it is the data.
even being able to forecast weather better than publicly available methods can be leveraged to gain a significant edge.
There's definitely alpha out there, but I wouldn't want to make it my job to look for it
That thesis is at least to some extent self-fulfilling, because there's so much money flowing into index funds that prices of all the underlying assets keep moving up, and there's probably not enough money trying to bid against that / arbitrage the excesses away.
A similar thing could happen with AI. Markets are efficient only if the world isn't in some sort of a trance.
If you want to read about this, see Sharpe (1991), The Arithmetic of Active Management.
There's also the fact that index funds have de facto become pension funds in most of the Western world, so Western politicians are trying to do their damn best to keep the stock exchanges afloat (i.e. always going up) in order to keep those aged 45-50 and older on their side when it comes to voting. We've last had a market crash in 2008-2009 (the covid thing was just a blip), I don't see today's politicians allowing a crash like that to happen if they can help it.
So in fact putting one's money into index funds is betting on the current political system continuing doing its thing, no need to involve any advanced maths.
The point of index funds isn't "these outperform all pickers, so they'll outperform all pickers in the future."
I think the idea is more around a combination of:
- you'll have much lower risk trying not to pick the right picker (or pick the investments yourself)
- the median picker is probably not very good (approached in two directions: sizable pickers that hit on an edge will likely be copied until the edge is gone, and smaller pickers are extremely unlikely to have enough specialized info or skills to excel).
Higher returns than what? I thought the whole point of buying broad market index funds was to simply get the market returns. For this thesis to make sense, you simply must assume that companies, in aggregate, make money - not that any particular company will follow past performance. If you don't think companies make money, then what are you doing buying equities?
But imagine a quant at Jane street. They see the same candlestick pattern as the pajama guy but their model is giving them actual odds ratios instead of gut instinct. They can now score their putative bull flags in real time and make investments that might be more likely to pay off than not.
A big reason why this works is that technical analysis is a self fulfilling prophecy. Many people are looking for and trading on the exact same signals and this is enough to see a pattern in the candlestick data actually be one associated with market movement. Whether the market movement is 'genuine' or manufactured by other quantitative technical traders in this self fulfilling prophecy doesn't matter, you've made your money and really don't care about the underlying asset at the end of the day, only its delta.