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I disagree with respect to Renaissance in particular, but I think others will probably comment on that point adequately. Instead, I’ll address this: > It makes more sense to me, due to a conviction on efficient market hypothesis. I encourage you to walk back from that position, or at least reexamine which particular form of the hypothesis you believe in. Only one form of the hypothesis (the “strong” EMH) dictates that consistently beating the market is infeasible. Fama himself has since stepped away from that level of conviction, because there is no demonstrable mechanism by which the markets can price in all nonpublic information (and frankly, it’s silly to assert that the market does not have nontrivial inefficiencies at any given time, except for the most conceptually academic of cases). It’s a very hard pill to swallow, and it gets harder when you look at the number of funds that ostensibly beat the market without insider information (RenTech is the most infamous, but there are other firms comparable to it that like to stay under the radar). The weak and semi-strong forms of EMH are much “neater” theories, both in intuition and empirical mapping to the real world. You can consider the weak and even semi-strong versions to be correct without precluding the capacity for certain exceptional firms to consistently earn better returns than the market average. It’s intuitively and demonstrably correct that public information is quickly “absorbed” into price consensus, but this is not at all clear for nonpublic information (though if insider trading becomes significant enough, it starts getting obvious to the market). In contrast, accepting the strong form of EMH requires you to resolve two difficulties: 1) how do funds like Renaissance beat the market if strong EMH is true?; 2) what mechanism can empirically demonstrate that the strong EMH is in effect, as opposed to “merely” the weak or semi-strong EMH? You can try to solve difficulty 1 by asserting that any given successful firm is actually illegally trading on confidential information, but you still have difficulty 2. Further, you have the obvious follow up: if these firms are successful only by acting illegally, why has it gone on so long? Apply Occam’s Razor: is your explanation more reasonable than the alternative, which is that a minority of organizations are capable of accomplishing something very difficult but not impossible? To circle back to your point about secrecy - it’s tempting to assume there is a decades-long conspiracy in play whenever rich companies are being extremely secretive, but it’s also a poor heuristic. A very simple and “Occams-compliant” explanation is that hedge funds are hyper-competitive, and go to great lengths to keep their intellectual property out of competitors’ hands. |