Are Quant and their algorithm destroying the pricing dynamics and finally leading markets to be more inefficient? Do you think that active investing will win over the passive in the long-term?
Active by definition cannot beat passive
The impression I get is that quant and algo based market participation tend to be either based on chart technicals or orderflow dynamics, both of which tend to be more useful in short term trading. I don’t think it is algo vs. fundamentals. They both play separate roles in an efficient market. The fundamental plays being based on value and the short term participants allowing the liquidity for this to happen more smoothly. If anything, algo make the market MORE efficient (in absence of the occasional hiccup flash crash and the like). None the less, at the end of the day value reveals itself and that is independent of what any algo could pressure the market to pretend to be the true value. In the end, correct prediction of value wins out no matter what algos do in the meanwhile.
By definition?
I’m kind of curious to hear what’s this definition based on?
maybe on average?
BRK and Renaissance Medallion (one fundamental and one quant) and many more have outperformed
Some active participants can beat passive. But active overall includes both sides of the trade. Passive benefits from the positive externality produced by the winners and losers of the active game. And that’s ignoring the operating costs for active managers just to try to be a winner.
I see what you’re saying, I agree. I misunderstood your initial comment.
https://dunncapital.com/wp-content/uploads/2018/12/WMA-4-page-update-November-2018.pdf
these guys seem to be doing okay.
And the result of the popularity of passive also means that active losers become passive holders, which results in the active space getting more and more competitive and some winners becoming losers. It’ll be fascinating to see how it ends, because the externality only exists if the active participants are doing their thing and paying their alpha seeking tax that is received by Vanguard. Perhaps there needs to be a tax on passive investments to ensure active management stays engaged in markets. Who knows!
Does anyone here know if there is specific software that outputs data like that, that people use to keep track of returns? Done by prime broker/custodian?
Well, there’s always insider trading.
Also, I should state that maximum return is not always maximum utility. You should be willing to give up some returns for better risk management.
For example, let’s say your portfolio is 100% asset A that has 10% expected return. I have a diverse portfolio of stocks that have 8% expected return. All these stocks have some probability of catastrophic loss. You should be willing to distribute some of superior stock A to me even if I offer you a 2% lower than market price, to offset your chance of ruin.
Imagine such a distribution among all market holders. The market maker generates “alpha” when risk is redistributed in the market. Return is overall net zero, but utility has increased overall. This might be hard to observe in liquid stocks, but it probably exists, such as when concentrated insiders sell their holdings of a stock that just increased dramatically. In illiquid assets, the risk premium of various products is very obvious.
Which data? You could probably do all that in excel
I guess it does look like basic excel… I need to look at the performance attribution chapters of the CFA again
Incomplete conclusion…
Incomplete rebuttal…
Fair enough?
No. Its not empirical. And it’s not the long term. It’s the structural fact for any time unit of measurement
Non capisco niente.
Non preoccuparti. Capisco tutto e ti insegnerò