Disruption
Disruption is happening all the time. And it will happen in the active investing business too. What is active investing? Anything which starts from intraday trading to mutual funds can be bundled as active investing. Anything which is designed to conserve capital (even if it does not) and deliver absolute returns is active. Anything non-standardized using fundamental analysis, quantitative, technical, Behavioural or interdisciplinary studies also would come under the same classification. Anything not Passive can also be called Active. Anything held for a periodic rebalancing of 3 months and higher (say up to 60 months) would be more towards Passive.
The Clear Distinction
An Apple cannot become an Orange
So if we could build a strategy which is absolute return, works cross assets, cross regions, cross risk preferences. And we can Index it. What will happen if such an indexing approach framework was possible? Active money managers could have a better benchmark to compare returns. Every strategy would not by default be benchmarked to S&P500 or any popular index. Out of the large passive universe there, it's easy to pinpoint what all your Active strategy outperformed. Your Active strategy will invariably outperform a lot of passive me too universe. But how realistic and accountable it is? It's not. It's not. Maybe the accountability works out in the advantage of the Active universe, which always has to keep defending itself against S&P 500. In the long term we are all dead, so how can you compare Active with Passive over the long run and say Active underperforms Passive. You can compare an apple with an orange and say the apple is not as good as the Orange or vice versa, but the comparison is redundant.
One Risk Preference?
Active and Passive are two different risk preferences. It's like the school of thought which says value is better than growth. I have a risk preference, what if my risk preference is not about holding value (reversion) for the long term, but playing with growth (momentum) for a shorter term. It's this risk preference the investing community has muddled up. The fruit market is for everybody, somebody needs apples, somebody needs oranges, and somebody grapes. If we don't sell beer to the wine drinker, why do we undersell the Active as Stone Age to sell the glorious Passive and vice versa. No customer surprise, delight, satisfaction here. "This is the only solution". We disagree.
It's all about Design
Design. I have been interacting with two friends, an architect and a designer. I am looking at extending the idea of Jiseki to fashion and even architecture. I have been telling them that fashion data is predictable. You can predict the colour of the next season, the style, the growth region, basically the preference. While speaking to the architect, she innocuously mentioned, "Mukul it's not about architecture, it's about design" She is studying advanced architecture, beyond architecture. And it suddenly hit me. Are we not all in the business of design? Design comes from data universality; designing fashion, architecture, financial innovations etc. Design is an ever evolving symmetry, moving from inefficiency to efficiency and evolving with time. The financial industry has to learn it too. And superior design has to be natural, so if a certain data design can drive fashion, architecture, web data, it can drive financial innovations too; it does. Extreme reversion is a phenomenon working across natural data systems.
Can design encompass skillset?
Now there are two ways to look at it. "A good design can never outperform a stock picking expert skillset" or "I am open to looking at good design that helps me understand and appreciate that an interdisciplinary quant strategy can lay down a framework for me to follow and benchmark". "It could change my business as lack of accountability has harmed Active more than benefited it". We are no more in a world of "My strategy is smarter than you". It's all about "Can we really build an Active Index?"
The author is CMT, Orpheus Risk Management Indices, an indexing company based out of UK
Disruption is happening all the time. And it will happen in the active investing business too. What is active investing? Anything which starts from intraday trading to mutual funds can be bundled as active investing. Anything which is designed to conserve capital (even if it does not) and deliver absolute returns is active. Anything non-standardized using fundamental analysis, quantitative, technical, Behavioural or interdisciplinary studies also would come under the same classification. Anything not Passive can also be called Active. Anything held for a periodic rebalancing of 3 months and higher (say up to 60 months) would be more towards Passive.
The Clear Distinction
Also Read
The clear distinction between the two could be absolute or relative returns, indexed or non-indexed, and shorter or longer holding periods. So where is the disruption? Since Passive is traditionally indexed while Active is considered the domain of experts. Because absolute money management is considered a skill set which needs product knowledge and expertise, Active style is considered primarily discretionary, and generally non indexable. This is where we have the potential of disruption.
An Apple cannot become an Orange
So if we could build a strategy which is absolute return, works cross assets, cross regions, cross risk preferences. And we can Index it. What will happen if such an indexing approach framework was possible? Active money managers could have a better benchmark to compare returns. Every strategy would not by default be benchmarked to S&P500 or any popular index. Out of the large passive universe there, it's easy to pinpoint what all your Active strategy outperformed. Your Active strategy will invariably outperform a lot of passive me too universe. But how realistic and accountable it is? It's not. It's not. Maybe the accountability works out in the advantage of the Active universe, which always has to keep defending itself against S&P 500. In the long term we are all dead, so how can you compare Active with Passive over the long run and say Active underperforms Passive. You can compare an apple with an orange and say the apple is not as good as the Orange or vice versa, but the comparison is redundant.
One Risk Preference?
Active and Passive are two different risk preferences. It's like the school of thought which says value is better than growth. I have a risk preference, what if my risk preference is not about holding value (reversion) for the long term, but playing with growth (momentum) for a shorter term. It's this risk preference the investing community has muddled up. The fruit market is for everybody, somebody needs apples, somebody needs oranges, and somebody grapes. If we don't sell beer to the wine drinker, why do we undersell the Active as Stone Age to sell the glorious Passive and vice versa. No customer surprise, delight, satisfaction here. "This is the only solution". We disagree.
It's all about Design
Design. I have been interacting with two friends, an architect and a designer. I am looking at extending the idea of Jiseki to fashion and even architecture. I have been telling them that fashion data is predictable. You can predict the colour of the next season, the style, the growth region, basically the preference. While speaking to the architect, she innocuously mentioned, "Mukul it's not about architecture, it's about design" She is studying advanced architecture, beyond architecture. And it suddenly hit me. Are we not all in the business of design? Design comes from data universality; designing fashion, architecture, financial innovations etc. Design is an ever evolving symmetry, moving from inefficiency to efficiency and evolving with time. The financial industry has to learn it too. And superior design has to be natural, so if a certain data design can drive fashion, architecture, web data, it can drive financial innovations too; it does. Extreme reversion is a phenomenon working across natural data systems.
Can design encompass skillset?
Now there are two ways to look at it. "A good design can never outperform a stock picking expert skillset" or "I am open to looking at good design that helps me understand and appreciate that an interdisciplinary quant strategy can lay down a framework for me to follow and benchmark". "It could change my business as lack of accountability has harmed Active more than benefited it". We are no more in a world of "My strategy is smarter than you". It's all about "Can we really build an Active Index?"
The author is CMT, Orpheus Risk Management Indices, an indexing company based out of UK