The highlight of the book is the following statement :
Any model should consider the following :
- Transaction Costs,
- Market Efficiency
and the objective of a investment strategy should be minimize first two, maximize third and work around the fourth. Liquidity and Taxes are the additional elements to make any model realistic.
Coming back to what the book is all about,
In the end , this book makes one think about the fund manager and the issues he/she faces
If one looks at a typical fund manager, he has to deal with the following :
- Public information
- Technology and what role he should allow it to play
- Portfolio selection
- Portfolio risk management
- His/her own emotional ups and downs while trading and taking positions
- Dealing with Investors
- Dealing with Markets
- Analysts – Fundamental, techinical ,quant jocks etc
The above are only a few things of a host of activities that a fund manager needs to look at. In the end, he is judged by only one thing – ALPHA
This book talks about changing dynamics of each of the factors mentioned above. The author takes a view that investing is becoming more like the whale hunting activity of yesteryears. In the initial period of whale hunting, the target was easily found near the shoreline. However as time passed, one had to go deep in to the ocean to get a whale and over a period of time, whale population was very scarce that hunting was no longer considered a business that one can depend upon. In the investment world, where the yesteryears were dominated by market efficiencies , a lot of managers were able to give handsome returns to the investors. But as the market became more efficient, alpha became elusive. With the rise of computing power, the arbitrage opportunities are becoming scarce.
So, how does one achieve alpha in these days where beating index is becoming more and more difficult. I don’t know..makes me wonder whether there is any case for stat arb trading models at all. Like pairs trading ,is there some strategy which is yet to be exploited by wallstreet ? May be there is, May be there isn’t…Reverse Law of Large numbers strategy, the emerging research output from behavioral finance would , i guess, throw more light in the times to come.