The Robin Hood Regime

It has move apparent to me inward the final calendar month that in that location has been a massive transfer of wealth from the gigantic hedge funds running ingredient models to many day-traders amongst accounts less than $10M. I telephone phone this the Robin Hood authorities (regime being a mutual technical term referring to a detail trading environment, every bit inward "this is a mean-reverting regime"). Many, many day-traders that I heard from get got had i of their best months inward a long while. Is this exactly luck, or is in that location a deeper explanation?

I believe that in that location is a philosophical divergence betwixt ingredient models as well as many of the mean-reverting strategies that day-traders similar to employ, a divergence that plant to the day-traders' favor. I scream upwards a wise musing from i of my one-time bosses: he believes that a trading strategy volition survive profitable inward the long run exclusively if it performs a service for other marketplace participants. The service that mean-reverting strategies performs is the provision of liquidity, inward particular, short-term liquidity. What service does ingredient models provide? They appear to survive exactly arrogant bets on the correctness of the managers' convictions. For e.g. I believe that stocks amongst skilful earnings volition rising inward value. Or, I believe that stocks amongst increasing toll momentum volition hold inward that momentum. True, close of the fourth dimension the convictions of the best managers are correct, as well as many of these convictions are truly mean-reverting too (for e.g. the "value" factors). But on average, a ingredient model may convey away every bit much liquidity from the marketplace every bit it provides. And sooner or later, exactly about of these convictions are wrong. Maybe non incorrect for really long, but long plenty to displace investors' panic. This may survive business office of what nosotros are seeing recently.

Now am I advocating that every gigantic fund but exactly switch from ingredient models to pure mean-reverting strategies? No: that would survive impractical when the portfolios involved are inward the tens of billions. If everybody run mean-reverting strategies, in that location volition hardly survive whatever mean-reversion left to net from. (Look what happened to pair-trading inward the final few years.) When y'all are an investor inward a multi-billion fund, as well as y'all hold off the fund to deliver higher returns than the risk-free rate, y'all exactly get got to convey that high short-term returns volatilities volition survive business office of the bargain, exactly similar whatever long-term investments.