jacob_cannell comments on Investment Strategy - Less Wrong

-6 Post author: Clarity 22 January 2016 02:26AM

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Comment author: jacob_cannell 23 January 2016 01:38:18AM 2 points [-]

Consider that you are competing with professionals, and the game is in some sense rigged against you.

To have an edge, you need novel insights/knowledge that allow you to predict some aspects of the future that are not yet priced in.

Comment author: Clarity 23 January 2016 01:50:28AM 0 points [-]

I think there are senses where the game is rigged in my favour too.

The fact remains; the fund more than likely owns securities that are performing perfectly fine. But due to changes in the index, securities no longer meeting the proper criteria, or even nearing its maturity, are simply eradicated. Usually this type of planned selling results in the worst possible trade execution and pricing on that day as a larger than normal sell volume hammers down bid prices. Many agile market participants have even learned to posture their portfolios to take advantage of this nonsensical behavior on the part of index funds. This is a primary reason, alongside the expense ratio, why most bond funds will underperform their indexes by a nominal amount each year.

I could just buy former index stocks that fall off the indexes, and take advantage of other such institutional edge cases that may not be efficient for pro's to capitalise on, no?

Comment author: ChristianKl 23 January 2016 01:47:09PM 0 points [-]

I could just buy former index stocks that fall off the indexes, and take advantage of other such institutional edge cases that may not be efficient for pro's to capitalise on, no?

Why shouldn't it be efficient for pro's to capitalize on the effect? There are likely hedge funds out there that trade on the effect. Those hedge funds have complex computer models to predict which stocks are going to fall in the future of the index. As a result they are going to make the trade days, hours or minutes earlier than you.

The high frequency traders are going to make most of the profit that's going to be made on the effect.

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