Active managers have struggled to add value. There is only so much alpha to go around. For every manager who wins, there has to be an offsetting losing bet.
This was in response to a comment that active sector selection is not a "great way to add alpha." At times, a tremendous amount of alpha can be added from active sector selection but not always of course.
The idea of finite alpha comes up occasionally and as I have said in the past this is an academic point not one from the real world in my opinion. The idea of an "offsetting losing bet" whether it is in sectors or anything else is especially funny in an article on ETFs. If every investor who uses sector funds decided at the same time they all wanted zero exposure to the healthcare sector then what would happen? There would be an onslaught of redemptions and the AUMs of all of the funds would go to zero (save for the existing short positions). Where ETFs are concerned there doesn't have to be an investor on the other side.
As for offsetting losing bet for stocks there are countless examples where this is not true. When you sell your Pfizer (PFE) the person on the other end of your trade (if it is a person) is buying Pfizer right? What if he is buying to close out his short? So you'd both be flat. What if the person buying your Pfizer is doing so to hedge some sort of other position?
It may not be suitable for you to use sector funds, individual stocks or spend much time trying to add alpha, or maybe it is, but where the permutations of stocks and option combos are limitless, alpha is not finite.
4 comments:
Reminds me of those contending that too much wealth is in the hands of too few people, as though wealth cannot be created and constantly expanded by practically anyone with the desire to succeed - a vision acted upon. Envy is not the road to creating wealth.The notion that wealth is static and finite, controlled by sinister beings, is the mantra of many a defeatist.
Taxing at an appropriate level of confiscation is another issue.
T
So if .1% (.001) of the population controls 20% of the country's income, or if 93% of income growth in a given year goes to the top 1%, it's no big deal because they "earned it"? Give me a large break,please! Something is askew, gentlemen! I am not "envious;" I am outraged and astounded! Open your eye, please!
I rest my case.
T
Roger,
when I was a research assistant as an undergrad I took on a research in the '70 on how to compare ancient Greek books for analysis, I developed a process for heterogeneous text. The research was sent to oxford university to Susan Hockey that had developed a computerized concordance but could not handle heterogeneous text(many text). Well, the English academia knew that research would change the world while the Americans stood still. I got $600 in 1977 for the work. Today, susan hockey is called the queen of computing when after 10 years from that research she developed the sglm text language. In 1990's Tim Lee_Berners of oxford (about 15 after) developed HTML for the internet. The English got the glory, the Americans got the money, MS, Goog, Aaapl, and the originator(pioneer) got $600. When I wrote to the university president, I did even get a response. Well T, you are correct, I will never do anything for anyone anymore, only If I think that I could get something that I know is the correct retribution. Giving so freely, no one appreciates, no one will thank you. Let them pay for it, then they will start appreciate. Look what that research did. Tech is growing and using that idea in an expediential way. I could never imagine. When I did that research, Steve Jobs was looking at letter types while I was writing programs to decipher ancient Greek text.
Best,
Jeff from Milan
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