I was chatting with a friend this week who I’m so happy for it makes me almost teary-eyed. He turned down an unbelievable job to take a chance on building an HFT startup a few years ago. It’s going VERY well. And it’s fun. And they’re hiring and all the things. I couldn’t help but say, “Man, you’re just in one of those sweet parts of the curve now”. The work fits like a glove and to quote Eddie Murphy “the ends are meeting like a muthfckr”.
It’s HFT with Sharpe so high you don’t bother with numbers, I just call it Charizard. I have to waste my breath because this is as cheap as an option gets, but “are you raising money?”
Of course not.
They raised once at the start and that’s it. Self-financing from here. Interestingly, they raised from VCs, not allocators. This unusual arrangement combined with the mathematical visibility of their edge, which doesn’t exist in long-term stock-picking, just had me thinking again about the nature of investing.
From The Paradox Of Provable Alpha, we know that the only place to mine for alpha among managers is among those with longer-term horizons. The regular investment firms are not as capacity constrained, are an underdog to have any edge at all, and happy to work for a small take on other people’s money. The managers that look like traders, with high turnover and sample sizes, who consistently crush, don’t want your money.
An advantage in long-run investing on the basis of pure analysis is very hard and even if you’re good you there’s no stats that will ever affirm you to be as good as you think. Active managers either think they charge too little, but since they can’t flaunt HFT stats, settle for what the market will bear, or the managers know they are way overpaid. Nobody thinks the fee is exactly right because the industry is some mix of a economic “lemon” problem and a circus exhibition that has little to do with serious investing and more with spectacle. (Pick your favorite negative alpha manager that finds a way to stay relevant and maintain assets).
Alpha in long-term investing is scarce for even more fundamental reasons. The nature of advantage in a zero-sum game (the warm drift of beta is a public good, but alpha is fixed…no winners without losers).
You have probably seen some version of the right/wrong vs consensus/contrarian 2×2 before. If you haven’t, you should sit under a tree with it for a while. It’s liberating in its proscriptiveness.
A looming annunciation of this problem comes from an interview VC Josh Wolfe had nearly a decade ago on Invest Like the Best.
He noticed that every one of his fund’s investments that became a giant winner was highly contentious at the start. Typically, the stake had just one passionate champion for it on the investment committee.
[Do not confuse this with all highly contentious ideas will be winners. It’s a statement conditional on the investment paying off huge already.]
In light of the 2×2, this is not surprising. If the investment makes obvious sense, it will be consensus and even overbid.
I’ve seen an analogous phenomenon in trading, but even in mock trading. I’ve talked about it a lot before, but when I watch a room of people mock trade, I can quickly tell quite a bit about the person from their action or lack of action (in the case of lack of action, I have to probe a bit, but the lack of action comes from a fairly small number of common reasons which are as telling as taking action).
[If I ever host an event like that again, maybe I’ll consider report cards, where I inform the individual what I learned about them and they can tell me if it matched their horoscope.]
But, one consistent trait that I think is good out of the box is the ability to act before all the info is obvious.
If you need to wait until the evidence is convincing, you’re too late. In fact, at that time you may want to be doing the opposite.
This is a ruthless aspect of markets because it defies the requirements of regular decision-making. In your daily life, you’re not in a race to buy the best phone or lunch before it’s gone. You can usually hold out for a bit more info, improve decision quality, and not have your patience used against you.
The ability to act before you have all the info is useful in other zero-sum games as well. There’s an unsavory connotation to say someone has great political instincts because the object is usually someone who seems impure. The left-coded VC who moved right sharply after Covid. Perhaps they were honestly disillusioned with their team. Perhaps it was just good for business. Either way, the begrudging respect one might hold for a winning political trade echoes the lauded financial agnosticism of great traders. Stan has no problem flipping a yard from long to short at a speed that obviously outpaces any kind of formal research process.
VC to me is an interesting solution to long-term investing because its very structure acknowledges the futility of analysis on forecasting what is going to pay-off. Instead, create a marketing machine that both stabilizes assets and makes founders, the lifeblood of your upside, want to come to you. Then diversify the lotto tickets. As long as you’re drawing from a sample that truly has no mean, then surviving practically ensures thriving.
Yes, the surviving is hard, but has surprisingly little to do with returns.
Related
The Efficient Venture Markets Hypothesis (9 min read)
Abraham Thomas doesn’t publish too often but I am always sure to read them. This one opens:
Venture capital is deeply weird these days. Consider these phenomena…
Thomas’ description of VC circa 2026 strikes me as a triumph of venture creating demand for its services by becoming a part of the “market portfolio” (in the CAPM sense of the word). It is now as much beta as SPX members, which elevates it above the bucket of crabs that is zero-sum competition for outperformance. VC funds are essential allocations to those trapped in the asset-managment-industrial complex should seem paradoxical if their scale ensures beta-level returns. But this article makes it make sense.