Standing against the establishment, having a voice and speaking up needs courage. This is what you did. You spoke up against the industry which started the first Mutual Fund in 1775. Bloomberg calls it a revolution, you call it a revolution, Wall Street Journal is calling it differently, but that does not matter. Mutual Funds are in a descent. Stock Pickers might still continue to follow Graham and Dodd approach, but the facts are overwhelming. If an institution can’t beat the index then it is wasting resources.
Though ‘Size’ is the most important factor explaining stock market returns, the possibility of size being a proxy was first mentioned in Banz (1978). Even after forty years of factor investing the industry is still looking for answers. This paper chronologically lists the research on ‘Size’ and why the question regarding ‘The Size Proxy’ has never been so relevant.
Before we talk about Blockchain disruption, let us talk about the implosion happening on Wall Street. The Realization that stock picking is dead  after decades of Active underperformance  has made beating the market an adventure sport, where only a few succeed. There was only one Peter Lynch , the active management is set to become 65% of the overall market , the high fees are gone  and if this was all not enough we have the ‘Do Nothing Strategy’ from Nevada’s Pension Fund Manager, Steve Edmundson who slashed the fee for external managers by nearly a 10th from an average USD 120 million to USD 18 million . All this leaves little for the yachts and barely little for the golf club. Above all this, the technology is killing the incentive to make markets. It is the rise of the ‘Buy Side’  and Virtu’s of the world, which never lose . Basically, the party is over.
If you can explain your money management innovation (rule-based portfolios) to your mom, it is golden. My mom gets it. Succeeding in selling and marketing a new financial innovation just like any other innovation will be about design. If it is not intuitive, no overselling, branding and marketing money is going to stop the jumping from the ship.
Investment management which is worth USD 70 trillion can be seen like a fruit basket. The job of the fund manager was to select the fruits from the market and sell it to the investor. Global pensions are a part of this pool. Despite the important role fund managers play, there is a lot of confusion regarding financial theories and lack of standardization between investment management practices. Investment solutions are primarily for a rising market. There are limited solutions for a falling market. The investment solutions are primarily equity focussed. There are no standardized metrics to look at all asset classes together i.e. equities, commodities, bonds, currencies, alternatives. Academic thinking is also very equity focussed. ‘Size’ the most important factor explaining stock market returns is not understood well. The lack of standardization, solutions for an up trended market, equity skew is the ‘Fruit Basket Paradox’, a term that explains the fragmented nature of financial theories and the circular argument that rots the investment management business today.
The rich do not always get richer. Explaining this probabilistically resolves a 100-year-old puzzle, opening up opportunities for smart beta portfolios, an architecture of complexity and eventually an architecture of data that could become Web 4.0.
Ok! advisors might be inefficient but is it enough reason for the media wave against them. Agreed that evolution has to happen, and after the industry restructured broking, sized up researchers, and the equity sales, maybe it’s time to disrupt advising. One may argue that somebody has to take the responsibility for underperformance netted for a fee, so maybe it’s time for retribution for advisors. But before we choose the robots over the advisors, and see passive investing as a solution for all investing, maybe we need another perspective.
Despite its popularity, the power law has not been without its failures and has rather come under criticism. In the paper ‘Scale-dependent price fluctuations for the Indian stock market’, Matia K, Pal M, Salunkay H, Stanley HE (2004), the authors explained how Indian stock market may belong to a universality of class different than that observed in developed markets.
Adaptive Market Hypothesis (AMH) embraces Efficient Market Hypothesis (EMH) as an idealization that is economically unrealizable, but which serves as a useful benchmark for measuring relative efficiency. AMH’s adaptability to changing dynamics of the market suggests that investors are potentially capable of an optimal dynamic allocation. There is nothing wrong here in the direction pointed by Andrew Lo. However the assumption that human innovation driven adaptability is the way ahead is an open-ended solution. This leaves little room for system thinking and overrules the possibility that natural systems could explain human behavior rather than vice versa. AMH just like EMH is based on a set of assumptions, which are good for illustrating market idealizations but lack in terms of addressing contradictions. This makes both AMH and EMH a system philosophy rather than a system framework. Reversion Diversion Hypothesis (RDH) (Pal, 2015) reconciles the contradictory assumptions into a statistical framework that addresses the limitations of EMH, AMH and extends the idea of a natural system functioning to markets.
I was in Mumbai recently, meeting fund managers to understand where India was on the smart beta road. How fast was investor education evolving? What was the appetite for ETF’s? And what should be done from the regulation point of view to take the Indian markets to the next stage?