Sebastian Mallaby: belief

Transcript context

…To ask the same question we discussed with venture capital, what is the non-replicable asset held by the very good hedge funds? Otherwise, more capital comes in and competes that excess return away, right? Yes. Again, I think the answer to your question is partly that capital does come in and compete excess returns away as strategies are discovered. As you look at the history of hedge funds, there keep on being new strategies that get invented, or maybe new areas of finance where old strategies can be applied. Now we’re in a world of big data, which means that new datasets become available to investors. You can crunch new sets of numbers, using new AI algorithms, and develop new insights about patterns that appear to repeat themselves in defiance of efficient market logic, and you can invest on those. The first people to do that will get supernormal returns. Then, after a bit, that technique may become understood by enough people that more capital comes in, and the returns get competed away. But this is a dynamic Darwinian evolutionary industry, and new methods and techniques will be invented as the old ones cease to be profitable. Let’s say there are some hedge funds that are quite special, but it seems a lot, the large numbers are not. Yet they’re still doing some version of 2 and 20 fee structure. How is that sustainable if a large class of hedge funds don’t really offer the promise of beating the market?…

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