Disruption is happening all the time. And it will happen in the active investing business too. What is active investing? Anything which starts from intraday trading to mutual funds to hedge funds can be bundled as active investing. Anything which is designed to conserve capital (even if it does not) and deliver absolute returns is Active. Anything non-standardized using fundamental analysis, quantitative, technical, behavioral or based on interdisciplinary studies also would come under the same classification. Anything not Passive can also be called Active. Anything held for a periodic rebalancing of 3 months and higher (say up to 60 months) would be more towards Passive.
Is there was a way to build a portfolio of non-leveraged short positions? This is new territory because industry’s focus on building models for a long-only focused market, but also because short, and long-short enter the alternative or hedge territory, an underrepresented segment globally. The idea of a short index does not exist while the short ETFs are in their nascency. As global money managers still are predominantly ‘buy and close’ rather than buy with a short hedge. As markets become harder to understand, the lines between trading and investing have finally started to blur.
Building my case from last time (the fortune index), where I suggested databases should talk to themselves and if natural systems express universal laws like patterns, divergences, seasonality, and constants then the data generated or derived from these natural systems should also express this universality. And if the data also express this universality then the question to be asked here is whether the universality character lies in something common to data rather than to a natural system.
Somehow my Interdisciplinary mind registered Eugene faster than Fama. After all Eugene Stanley, the father of Econophysics could also get a Nobel. If Psychologists could get the biggest award for Economics, a physicist could have been there too. But then the surprise became bigger, not because it was Fama, not Stanley but because Robert Shiller shared the award.
Data models should work across regions, across nature, across data sets. This means “Data Universality”. If natural phenomenon exhibit universal patterns like geometry, outliers, 80-20 principle, mean reversion, fat tails etc. then the data these natural phenomena generate should also express a similar behavior; actually they do. But we still consider data sets as religious, the stock market data is useful for the financial analyst, while the subatomic data is useful for physicists, the social network data is for marketers.
Why is the stock market not a science? Today many elements of our life have a degree of predictability, consumption patterns, social behavior, earthquakes, etc. However, the predictive measure is lacking when it comes to stock markets. Behavioral finance highlighted this lacking measure and accountability. Even statisticians limit themselves to the prediction of stock market volatility rather than stock market direction.
In 1827, Robert Brown saw a random movement of pollen particles in water. This was called Brownian motion, also the drunkard’s walk. In 1902, Einstein proved this and confirmed the presence of atoms and molecules. This was 100 years after the atomic theory was proposed by John Dalton and was the first attempt to reconcile wave and particle theory. The debate has taken another form, as classical physics can’t be reconciled with quantum entanglement, which meant free will does not work, a particle can’t make its fate by hard work and awareness, its fate was predetermined.
Just like we don’t need to understand inflation for it to trouble us, we really don’t need to be able to spell statistics for it to rule us. The realization of an average lifespan could have pushed many saints towards the spiritual path, but for us simple material investors, our life moves around a statistical average.
The phenomenon in which one regular cycle locks into another is called entrainment, or mode locking. Entrainment explains why stock market components are like flocking birds and herd behavior of land animals