macrocephalopod

So to trade this stuff effectively we need: - to understand why the inefficiency would persist - faster converging metrics around what we're exploiting so we're not "the last to know" when the inefficiency disappears - patience and discipline to "keep swinging the bat"

Useful sources for this kind of stuff include: - Expected Returns, Antti Ilmanen - Efficiently Inefficient - Pedersen - Positional Option Trading @SinclairEuan (which literally gives you stuff to trade) - Active Portfolio Management - Grinhold, Kahn

Generally, this stuff is less reliable than 1) risk premia harvesting and 3) fast-converging flow effects. "Home gamer" traders usually spend too much time here, and too little time on risk premia harvesting. Active managers of size play here tho they'd rather be playing 3)

3rd category: Trading fast-converging supply-demand imbalances This stuff is the bread-and-butter of proprietary trading firms. Short term supply/demand imbalances create dislocations in prices which fast traders can "disperse" by trading against and offsetting risk elsewhere.

These trades are conceptually simple and economically sound. For example, I might buy sell futures on Shanghai INE and buy a similar contract cheaper on Singapore SGX for a profit (after costs). That's a simple "arb" though it carries risks cos we can't trade instantaneously

More normally though, we're doing riskier trades that we expect to work out on average. We're serially looking to buy cheap and sell high based usually on simple relative-value models. The assumption is made that deviations from (relative) fair value will converge...

So models are less about "predicting the future" (as per 2) and more about "extrapolating the present" (Q vs P). "But you're *predicting* convergence to your model of fair value you're using to quantify cheap/expensive?" Yeah, exactly.

Advantages of these trades are: - they're easy to understand and economically simple - they converge fast to expected pnl. You know quickly when your model is out or you don't have edge anymore. They fit nicely with @KrisAbdelmessih's "measurement and normalization" paradigm