5 ms·

It is unclear how index funds would function without someone doing price discovery (i.e., active investors).

by mertd 8y ago

OscarCunningham 8y ago
I'm not convinced by the index-funds-socialism thing, but I did once have a fun realisation about index funds owning the market. Because of short-selling, index funds could own all the market or more and active funds could still exist. For example we could imagine that index funds grow until they're 105% of the market, and active funds own 5% of the market long and 10% of it short. That adds up: 105% + 5% - 10% = 100%. And the active funds would still be doing all the price discovery. Of course the index funds wouldn't have all the assets-under-management, those would be split in the ratio 105:15 (with 10 of that 15 being collateral for the shorts). In other words: it doesn't matter if index funds own all the shares, active funds can just make side bets with each other.
- nostrademons 8y ago
  Hmm. I wonder if the same thing could happen in the cryptocurrency markets, where literally 100% of Bitcoin holders lose their private keys and yet we still have active, liquid price discovery consisting of speculators making side bets on BitMex.
  - dfischer 8y ago
    Gamblers gonna gamble.
- pbreit 8y ago
  Isn’t a mere 51% effective ownership?
  - discodave 8y ago
    Not for SNAP, Facebook, Google and others with gerrymandered share classes.
pm90 8y ago
Simple: there will always be active investors. With the progress AI is making, I predict a future where humans-run firms will mostly go out of business. What will emerge are companies that are great at training models that then act as active investors. These models bet against each other and some emerge as winners. Ultimately, the models that make the most bank (sorry couldn't resist) will be the ones smart enough to make its decisions based on public data from companies, social media etc.
- discodave 8y ago
  > I predict a future where humans-run firms will mostly go out of business. What will emerge are companies that are great at training models that then act as active investors. These models bet against each other and some emerge as winners. This is already happening, HFT, Two Sigma Investments, many hedge funds. And they don't just use public data, they work really hard to get as much proprietary information as they can. Just one example: https://www.cnbc.com/id/38722872 https://www.cnbc.com/id/38722872
  - cbailes 8y ago
    For anyone interested in learning more, here’s a compendium on deep trading: https://github.com/cbailes/awesome-deep-trading https://github.com/cbailes/awesome-deep-trading

It is unclear how index funds would function without someone doing price discovery (i.e., active investors).

by mertd 8y ago

It is unclear how index funds would function without someone doing price discovery (i.e., active investors).

I'm not convinced by the index-funds-socialism thing, but I did once have a fun realisation about index funds owning the market. Because of short-selling, index funds could own all the market or more and active funds could still exist. For example we could imagine that index funds grow until they're 105% of the market, and active funds own 5% of the market long and 10% of it short. That adds up: 105% + 5% - 10% = 100%. And the active funds would still be doing all the price discovery. Of course the index funds wouldn't have all the assets-under-management, those would be split in the ratio 105:15 (with 10 of that 15 being collateral for the shorts). In other words: it doesn't matter if index funds own all the shares, active funds can just make side bets with each other.

nostrademons 8y ago
Hmm. I wonder if the same thing could happen in the cryptocurrency markets, where literally 100% of Bitcoin holders lose their private keys and yet we still have active, liquid price discovery consisting of speculators making side bets on BitMex.
- dfischer 8y ago
  Gamblers gonna gamble.
pbreit 8y ago
Isn’t a mere 51% effective ownership?
- discodave 8y ago
  Not for SNAP, Facebook, Google and others with gerrymandered share classes.

pm90 8y ago

Simple: there will always be active investors. With the progress AI is making, I predict a future where humans-run firms will mostly go out of business. What will emerge are companies that are great at training models that then act as active investors. These models bet against each other and some emerge as winners. Ultimately, the models that make the most bank (sorry couldn't resist) will be the ones smart enough to make its decisions based on public data from companies, social media etc.

discodave 8y ago
> I predict a future where humans-run firms will mostly go out of business. What will emerge are companies that are great at training models that then act as active investors. These models bet against each other and some emerge as winners. This is already happening, HFT, Two Sigma Investments, many hedge funds. And they don't just use public data, they work really hard to get as much proprietary information as they can. Just one example: https://www.cnbc.com/id/38722872 https://www.cnbc.com/id/38722872
- cbailes 8y ago
  For anyone interested in learning more, here’s a compendium on deep trading: https://github.com/cbailes/awesome-deep-trading https://github.com/cbailes/awesome-deep-trading