But shouldn't we consider as possible cause the fact that CTAs became common. When multiple parties use the same strategy it can not be winning any more for everybody.
> Part of the problem, according to critics, is too much money now chases the same trends, undermining what traders call "alpha" — the outperformance possible relative to a benchmark.
The same issue holds true for stocks, which are also valued based on a claim for some predicted future cash flows.
An asset is exactly something that can generate future cashflows, even if only by being sold. A security is a special kind of asset that can be easily traded on paper without changing it's value or taking on transformative effort.
So, your goose that lays golden eggs is indeed an asset, but it might be hard to trade because many folks aren't well prepared to own a giose. If you wrap it up in contracts about someone who will house and feed the goose, collect and sell the eggs and forward the money to the holder of a deed - congrats, that deed is now a security.
1. The rate of meaningful new discoveries in basic research has slowed significantly compared to the mid 1900s. Most important advances now involve enormous groups of researchers, and require decades of work. So the basic research route is less appealing overall.
2. Technology and finance provide clear avenues for outsized financial returns that simply weren't available in the past. Enrico Fermi, for example, was fairly enterprising. He wasn't an academic ascetic at least, and made some effort to amass wealth. But the best strategies he came up with were publishing textbooks and maybe some dabbling in the stock market (That is if I remember my details from The Last Man Who Knew Everything  correctly)
IMHO this is so obvious -- cost of living, especially housing, healthcare, and higher-education.
A modest salary back in the 80s was good enough to raise a family on. A modest salary these days rarely does. Let me present some actual numbers:
My father purchased a house for ~30k USD. His annual salary was ~30k USD. He was always insistent on working at non-profits and did that for decades as an accountant/auditor/comptroller.
Today, I cannot easily afford the same house even on a mid-high-end salary because the affordability ratio is enormous 2x or 3x. Forget about affording that house on a non-profit org salary.
Further, Bell Labs was a very safe job, you didnt have to worry about layoffs as much back then. So you could further afford things by making a bet on an affordable suburb. That is a harder bet today -- you move to some affordable suburb (which still isnt as affordable as it used to be) and suddenly you've lost your job. You better hope it is close to a commutable metro area.
Same thing with healthcare. Same thing with higher ed. I joined finance, and later tech, because I saw the writing on the wall -- not because I was "pursuing wealth" but because I was pursuing the same exact lifestyle my dad had as a default.
This is something in essence that some of us at MIT get told by faculty upon telling them that we want to go into industry. Behind it, though, there is often a fair bit of arrogance: many of them can not truthfully say that they would not do the same if they had to accept an academic position at a "tier 2" place, long postdoc, etc.
That said, the spirit of the point is perfectly fine. My own personal answer is that I have no personal issue with the compensation in academia; the associated "bureaucracy" which is far more severe today (paper/citation counts, and other things of even less significance) turns me away. It remains to be seen for myself how "industrial bureaucracy" compares with it. However, everyone I know has told me that in terms of personal happiness/fulfillment, people who leave are usually much better off.
I mention this as I had a conversation where someone essentially assumed point 1 or 2 rather than the distinct reason above.
A society grows great when old men plant trees whose shade they know they shall never sit in?
From each according to their abilities, to each according to their needs?
It is a very recent idea that the best society is created by everyone pursuing only their own self-interest.
Honestly curious about which country you live in? I know some Nordic countries operate this way, but certainly not the US. Here in the US the above strategy would be a crushing losing one -- because the latter half of the "agreement" does not hold.
Suppose you do offer from your abilities and dedicate your live to research, non-profits, education, whatever. There is no social agreement on the other side "to each according to their needs." It is not as if dedicating your life to good social causes suddenly causes massive medical co-pays/co-insurance/deductibles to disappear. It is not as if dedicating your life to good social causes suddenly lands your children a good education (more likely, you'll end up in an impoverished school district with lots of problems.)
What you're proposing works well when both sides of the agreement are in place. Other than that, people have go into social good knowing full well they may pay the cost.
I have a relative who runs a non-profit community medical clinic for those without insurance. From what I can see, the family lives paycheck to paycheck. If the roof breaks or boiler goes bust I can see them being in a lot of trouble.
They accepted this fact and still do it. But that is a very personal and risky decision. One cannot browbeat others into taking such risky decisions.
I agree that people shouldn't be blamed for looking out for their own needs first (within limits - when billionaires use underhanded tactics to expand their empires, they certainly should be blamed). But I also think working only for your own self-interest shouldn't be idealized, as is more and more the case in the US.
As for which country I live in - one where people are taxed based on their income (from each according to their abilities), and that money is used mostly to fund things for the common good, such as medical care, education, and a social safety net (to each according to their needs). The degree of this transfer is greater than in the US, but that's just it - it's only a matter of degree.
There is a lot to say on the subject of whether the financial system regulation is creating the right incentives. But there isn't really much room to debate that designing trading strategies is a waste of talent.
Bit risky telling someone what their job is, but nevertheless I'd suggest you missed the forest for the trees. The profitability of a trading firm is directly linked to their ability to allocate capital in a way the market likes, and someone with great information thinks that hiring lots of smart people achieves their goals more effectively than hiring small numbers of smart people.
> Something is seriously twisted in its current state
100%, but it isn't the concentration of smart people in finance. That is a good thing - better more scheming bankers than lawyers.
Free market capitalism gives capitalists perfect freedom to operate in the sliver of the Venn diagram that connects what is possible with what customers will pay for. If they step outside that, they go bust.
If there is a problem is probably that the US government didn't let enough companies go bankrupt in the aftermath of the 2008 crisis, and the same idiots that were in charge then are still in charge, or their protegees.
Well...sure, but I don't see these people working to allocate capital to benefit society.
On the whole, the financial industry's influence tends to be to allocate capital to benefit the financial industry.
I get that liquidity is important, but it's not important enough that we should be siphoning off huge chunks of the money in the economy to give to these people as thanks for maintaining it. Frankly, that kind of concentration of wealth decreases liquidity and ends up, over the long term, being directly counter to the stated goal.
Everyone should then actively decide what specific companies they want to put their capital towards. Instead of baskets of indices.
Are you saying it's not a waste of talent?
Perhaps we should consider fintech and adtech to be similar scenarios? Fintech seems to have externalities that lead to ever growing income inequality. Adtech definitely has externalities on society in the form of increased susceptibility to foreign propaganda and mass surveillance.
I suspect the higher salaries in fintech and adtech are similarly inflated to fossil industry salaries due to the lack of taxing externalities.
It's not like they are helpless victims to economic principles, so they have no other choice than to work for the scummiest types of companies because they offer good pay.
If you’re more interested in shifting the landscape, changing the incentives becomes the priority.
Only one of these puts a stop to the objectionable behavior and wasted talent. So I know which I prefer.
Or changing laws to make the bad stuff illegal.
I'd be happy to make most ads illegal. In some places they banned all roadside billboards and you know what happened? It made the view better and didn't hurt the economy.
EDIT: Oops, I misread your comment.
Sometimes common knowledge of a strategy can lead to the elimination of the situation in which it works. Participants can anticipate it and so the conditions no longer occur.
In other cases so many participants pike into the strategy, in which there is only so much money to be made, that returns get so thin that only the very most efficient and smart participants can get anything out if it. Arbitrage is a good example, once its known it can get traded out of the market very rapidly.
Note that the strategies described in this article are not arbitrage nor zero sum.
CTAs have been around since the 1970s. Momentum trading has been around basically forever.
The Fed under Paul Volcker raised rates over 20% in the early 80s to head off inflation. Before the crisis of 2008 rates were 5% or so. It's only after the GFC that rates have been lowered to near zero.
Also, according to the article momentum trading failed to deliver after 2008, while rates were low (and the market tripled), not just now.
Trend following strategies are pure market followers and are not based on fundamentals, therefore they do not bring any new information into markets and are unlikely to improve the efficiency of a market.
Yes, absolutely. Go back to Greek mythology (or even the Matrix movies). Many predictions the Oracle made only came about precisely because the Oracle made those predictions.
There can only 1 be the fastest and those that invest their money this way, could probably used it in a better way.
And if you are winning. A small error in the algorithm could make you lose all of your profits. Rare events do happen and you haven't covered every case.
> Between 2008 and 2018, Societe Generale’s main trend-following index made only 3.7 percent, compared with an average gain of 62 percent for hedge funds and a more than tripling in the S&P 500, including dividends.
The market performed incredibly well over this period. These algorithms didn’t even keep up with inflation.