Once you correct for the survival bias, leveraged buy-side intermediaries have done quite poorly. Why does the species still exist? 1/
https://twitter.com/jtepper2/status/1378065165095161858
As Prado puts it, informed investors are investors that are more informed than the dealers. This is a hard thing to do. A lot of money must be invested in price discovery. What hedge funds are supposed to do is identify mispricing better than the dealers. 2/
This requires a lot of arbitrage capital — a quantity that is endogenously determined along the lines of Shin & co's 'theory of arbitrage capital'. modul.repo.mercubuana-yogya.ac.id/modul/files/op… 3/
The basic logic is that you need to keep your power dry for arbitrage opportunities. An intermediary theory of arbitrage capital is a theory of why one should keep one's power dry. This logic drives the world informed investors. 4/
As always, most people don't really know what's up, so there's a lot of "dumb capital" in the hedge fund industry too. But in the technical literature, there is a precise notion of dumb money. 5/
"Dumb money" is what are called "noise traders" in the microstructure literature. They are not informed but want to take positional bets. Functionally, they exist to kick asset prices randomly and generate the mispricing that arbitrage capital harvests. 6/
Put another way, this is the small fry or retail investor. That's the normal course of things that was violated by GameStop, where the financial lumpenproletariat discovered the power of coordination. 7/
What was discovered by Reddit traders in the GameStop drama was that noise traders could generate systematic information by coordinating their market activity. That's how they were able to beat the informed investors with industrial scale resources. 8/
The "French Revolution in Finance" may not have been merely an extraordinary event revealing the structures of power by overturning them for a second. It may be back. Reflexivity of the financial herd is not easily bottled once discovered. 9/
My advice to small investors is to put their money in index funds. My advice to big investors is to pay attention to the logic of the structure in the world — intermediary behavioral patterns dictated by constraints — that generates the signal u want to harvest. 10/10
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