[smabie]

What you’re saying is not what EMH says at all. EMH posits that there is only one Sharpe ratio: the market Sharpe. In other words, I cannot earn better risk adjusted returns than the market.

But anyways, no one actually believes that. EMH is used as a framework to price securities and as a way to reason about the market. Quant finance doesn’t work without the no arbitrage condition and therefore, EMH. EMH has absolutely nothing to do with “making a profit.” If fact, quant finance and EMH are built on a sure fire way to make a profit: the risk-free rate.

In short, while alpha is, by definition, a zero sum game, beta is not. So we can make profit pretty easily, and this is what most of the world does: obtain exposure to beta and make money.

[lalaland1125]

Correct. I should have been explicit. By "profit", I meant profit relative to the market.

I do agree that the EMH doesn't exactly hold. Empirical proof of that is the existence of profitable trading firms. However, the reasoning behind EMH does imply something about the difficulty of earning profit relative to the market. And I do think it is a theory that people should be aware of when they start trying to understand finance.

[xorfish]

Isn't the whole point of these forms arbitrage?

There is lots of data that shows that active managers don't do better than the market.

[throwawaymath]

No, there is a lot of evidence showing that most active managers, investors and analysts can't outperform the market. There are counterexamples which demonstrate consistent outperformance, they're just the minority. Likewise most basketball players aren't good enough to join the NBA, and most players in the NBA aren't good enough to secure $10 - 100 million contracts.

The EMH doesn't even preclude the possibility of consistently beating the market (consistently mining alpha); it simply states that the cost of providing those investments as a service rationally rises to cannibalize the outsized returns, so it becomes a wash.

We see this in practice: the well known hedge funds which demonstrate consistent alpha eventually close their doors to outside investors. Why pool risk with external capital when you're printing money? Investors are a hassle and no strategy can scale infinitely. When you can consistently mine alpha it's strictly better to just become a prop shop and run on your own money.

[xorfish]

How do you differetiate a manager that outperforms by luck from one that outperforms by skill. Data shows that managers that outperformed in the past are not more likely to outperform in the future.

[throwawaymath]

You keep talking about this data, but you're not citing any of it. Therefore I'm not sure how to specifically counter what you've read.

But in the abstract, you differentiate them the same way you implement any hypothetical distinguisher in probability theory. Consider an n-sigma event observed to occur consistently. As n increases the likelihood of the event occurring by chance (rather than agency) decreases.

[xorfish]

https://www.aei.org/carpe-diem/more-evidence-that-its-really...

There are so few managers that beat the market and then it might still be luck. Until you can be sure that a manager really is concistently better than the market he will be in his sixties.

We know factors that concistently outperform the market. So why not passively follow them?

[bumby]

Are you aware of any in-depth explanations of the low-volatility anomaly? The best I’ve found is by Baker and they seem to point out alpha generation over long periods of time. I’m just a curious novice but I’m also wondering what it takes for an ‘anomaly’ to be considered more than a small aberration

[xorfish]

There are other factors than just beta. Size, value, profitablity and investements.

[bdkoepke]

True for strong-form EMH but not for semi-strong or weak.