What's your edge?
Everyone knows that for those of us in the business of active management, you have to 'talk yourself out of the market portfolio' - Gene Fama. You have to ask yourself every day what makes you think you have an edge over the rest of the market, why you believe you are above average when by definition not everyone can be above average and the best guess for yourself is that you're average, that justifies you taking on idio risk that markets don't reward.
So, HF analysts and PMs on WSO, what makes you believe you have an edge? Back it up.
Nice try.
lol
Inside information
And investing based on my daily Taro reading
@OP username checks out
My autism
lol’d thank you
Mostly delusion driven by some qualitative argument based on my "investment philosophy", which is an amalgamation of books and articles and podcasts and other interviews over the years, learning from seniors on the job / my short practical experience, and thinking only about a few key correct investments I made (that I haven't overly analyzed in retrospect to differentiate from luck, factor, or anything else).
Realistically, a PM once told me that they don't think edge is real and most people are talking marketing bs when asked this question. That PM said their skill was pressing the best risk/rewards at the right time + process, and that their ideas usually weren't correct >50%, but they sized accordingly (+ve net L/S equities). That said, we can look at the past and identify attractive runs of returns by different managers, and look at the processes that generated it.
For quant - medallion has an edge, and there are tons of other shops with a "true edge", but I don't understand that world well enough to talk about it.
For some PE and other players, time / durability of capital, and scale + access were probably big drivers of edge (let us not forget rates...).
For a lot of L/S. I believe it comes down to process and intellectual honesty. We can look at the data for some pods, and see that they are likely to generate good alpha in 3-4 out of every 5 years, and it comes down to having a good process. Not rocket science - resources, time efficiency, tracking your sector closely, staying ahead of the curve on narratives + inflection points, data budgets, and a lot of grinding... The true "edge" comes from rolling up these pods into a product to sell to LPs, but that doesn't answer our question.
For the rest of L/S world with longer duration - markets evolve and these managers usually got rich already and didn't need to compete as hard and/or the opportunity they capitalized on got competed away, but for a time period they capitalized on a trend really well, or plausibly were better able to weigh the risk/reward for various visions of the future before the markets had access to the same information and/or processes?
For other parts of the market like credit, special situations, etc. - scale and access are probably big as well.
As always, the above is mostly speculation...
How do you know they have an edge if you dont understand the world well enough?
Well I have enough basic knowledge, and some people have told me some basic things. Mostly, I just look at medallion's returns. If you are able to put up 50%-70% gross returns, consistently for decades, whilst also having a beta of -1.0, I'm willing to bet you have an "edge" (something that makes you somewhat confident that you will continue to perform pretty strongly going forward). From what I have heard, a few quant prop shops are putting up similar levels of PnL these days as well.
https://www.cornell-capital.com/blog/2020/02/medallion-fund-the-ultimat…
Would also add there's a material difference in alpha in SM L/S and MM L/S. I think the data / information flow edge in MM is likely going to be tapped out in the near future and force a lot of that side of the industry to find ways to differentiate; i.e. if everyone has access to the same information then staying close to/on top of your relevant data in a given sector is table stakes. The onus becomes either 1) having a view on forward data that we don't know or 2) finding a different core driver or KPI to have a view/edge on. Given how wrong data is anyways in being directly correlative to most public company PNL, I think the edge at the MM level is some combination of speed / slugging % / pressing winners or trimming losers. Inflection points are the game so it becomes very qualitative in nature at the MM duration level to identify when those changes are occurring and how to profit off of them.
For the SMs I think the edge is similar to PE in some regard, duration and "arbitraging" where the pods miss. Meaning the pods are all essentially playing the same game, so SMs can succeed or "have an edge" in taking a directional view on estimate revisions, focus on nailing KPIs that aren't data-accessible (stuff like margins, FCF), and as mentioned in another post getting factor views right. The number of times a stock pre-trades its earnings release just for the data to have misinformed every investor taking print risk focused on a big top-line beat probably matches the number of times that the stock pre-traded according to a perfect read on that data. SMs can (and probably do) try to exploit this by extending their duration curve and playing that 2nd, 3rd, 4th derivative where the MMs aren't expressing their views as frequently.
Would also just add an edge can be far more simple... it can be managing risk extraordinarily well, using valuation as a crutch or implementing valuation as a crucial piece of the strategy. You can have an edge in tracking small caps who are under-trafficked by the pods. Again edge can loosely just be defined as your ability to drive alpha which is excess return per unit of risk. My view is that the excess return available to MM L/S pods is decreasing while unit risk stays the same, whereas in SM it may actually be expanding (excess return for their duration) while unit risk has been steadily increasing over time (valuations less supportive or more "accurate" heightening risk that you are wrong). I think being a contrarian is partially an edge in and of itself.
New guy trying to learn here. Can you provide a bit more explanation (or reading resources) on how a SM might “extend duration” or leverage derivatives to capitalize on MM pods pre-trading on expected over-delivered earnings or accurately forecasted earnings? Just curious on the mechanics here!
Not an HF guy here but loved this video
Good memory / learning, selling when you should, slugging percentage
Find good mentors who you want to learn from, constantly think about downside, intellectual honesty
Curiosity about businesses that comes naturally - loving it - be competitive - be afraid / skeptical when you should
oh shit yea i watched this interview when it first came out 2 years ago and it got me so pumped. Didn't know Scott Goodwin back then but know of him now that he appeared on O'Shaughnessy's podcast. Nostalgia
International Mathematical Olympiad (IMO) medalist for two years, back to back.
Simply have a better brain than others, especially far superior than those fundamental apes at SM with their neanderthal bottom-up analysis.
LTCM guys thought they were real smart too...
Yeah I’m sure guys like gabe plotkin, bill ackman and Chase Coleman wish they had a IMO medal instead of billions of dollars.
All their combined intellectual capabilities, on a good day, might be equal to RenTech's Jim Simons's fart.
Gabe Plotkin doesn't have a billion dollars anymore. Melvin Capital blew up, remember?
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A lot of managers beat the market gross of fees. So it’s not that it’s so impossible to beat the market; it’s just very hard for the end client to beat the market after fees.
My edge is edging
Best way to increase your bench press max or so I hear
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