Sunday, September 20, 2009

Finding Alpha Videos

Tyler Cowen was nice enough to review my book, and so I might have some newbies here. Note you can see a bunch of videos that outline some of my main arguments here, and an SSRN paper on the general theme is here. Below is an intro on the book.


Anonymous said...

I just worked my way through your videos and had one comment. First, before the comment, I want to note that I agree with just about everything you've put in them. In the last video, you state that people aren't selling real strategies that generate sharpe ratios above 1. This is the "market for lemons" idea - and I agree with it for the most part. Where is breaks down is when you are trying to become a fund manager, and have a successful strategy, but no one will fund it. Now, the common argument is that if such a strategy existed, investors would be LINING UP to get in - especially with a decently long track record (let's say 3-5 years). Now, any strategy can naturally fall apart. But let's assume for the moment that such strategy exists (and I know of at least 3-5 that do), and that they are scalable - then they should naturally find funding. However, what they have found (in talking with them) is that if they exist at all outside the mainstream of Wall Street, they can't get funded.

So - to sum up - there may be strategies that exist for the public that can have a sharpe ratio greater than 1, but they may not be broadly available because they exist outside the structure of the mainstream Wall Street crowd - not unlike your concept of the Investment Advisor is far more likely to convince someone to go with a particular fund based on the idea that everyone else is doing it (envy) - in particular, notice the rise of hedge fund replicators - either synthetics like Andrew Lo's, or more basic ones like those generated by AlphaClone.

In terms of the retail investor, however, the likelihood of them discovering these successful strategies is about zero - so there your point is solid.

I just get a bit sick of the argument "well, if they had something, it would have been funded" because, in my experience, it is simply not the case.

Thoughts appreciated!

cityislander said...

>"Many thought that inflation would rise when unemployment went below 6.0%, but then in the late 90's it went to 4.4%, and inflation did not rise"

It could a consequence of central banks acting on Lucas' principles that there's no point in letting inflation rise (avoiding booms and busts).

Or perhaps wages were structurally going down (weaker labor unions), hence both unemployment and inflation went down?

Chicken or the egg problem.