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Man FRM Early View

April 2019


Five years ago, (March 2014) Daniel Kahneman filled the 2,300 seats of the Methodist Hall in London at prices averaging well over £20, marketing his book Thinking Fast and Slow – a book about biases in human rationality. The expensive seats were crowded out with hedge fund managers and their broking hosts. Bizarre as this may seem, there was no escaping the popularity of behavioral finance.

Right now, hedge fund strategies based on inefficiencies generated by human trading decisions are in an unhappy state: the rolling debate on the death of momentum has been rudely suppressed only by an even more urgent debate on the death of value. Should we care? Absolutely. This is not just a knife fight in a phone box about hedge funds: these questions are driving problems across the whole liquid investment universe. If trading decisions now sit mostly with computers, particularly ones which run routine index matching algorithms, then Kahneman’s web of human biases will play a much smaller part in the market pricing, and this, in turn, will leave less investment opportunity for our brilliant pointy heads who supposedly float above these biases. The next iteration is for all this genius to profit from the errors of its own ways, but though there is a certain amount of that going on, it’s a much tougher gig. If, as an investor, you want the benefits of this type of inefficiency be warned that entry to the club is mostly by invitation only, and the price of membership is both truly eye watering and rising.

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Informing the Hedge Fund Community. With access to some of the industry’s biggest names and an astute and talented group of writers and contributors, The Hedge Fund Journal has established itself as a trusted source of information on the hedge fund industry.