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Top Traders Unplugged
SI271: Can Slippage be a Source of Alpha? ft. Mark Rzepczynski
Nov 25, 2023
Mark Rzepczynski, a guest on the podcast, dissects the macro rally and discusses the attention to CTAs, confusing survey data, and common investor questions. They also explore the concept of explanatory depth in trend following and the importance of mastering attention and speed of adjustment. The podcast wraps up with a debate on slippage as a source of alpha in trend following.
01:08:40
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Quick takeaways
- Trend following strategies can exploit market inattention and slow speed of adjustment for profitable trading opportunities.
- Predicting the direction of stocks, rather than focusing on forecast accuracy, can be a winning approach in stock markets.
Deep dives
Inattention and Slow Speed of Adjustment
The podcast discusses the concept of market inattention and the slow speed of adjustment, which creates opportunities for trend following strategies. The idea is that due to inattention, investors may not fully react to information quickly, leading to trends and momentum in the markets. This is supported by studies showing that expectations and reactions to information are slow and that some smart money exhibits poor selling decisions. The ability of systematic models to quickly assess and react to information gives them an edge in exploiting market inattention. While information flow has increased over time, creating faster speed of adjustments, longer-term trend following models still exhibit strong performance. There is research indicating that shorter-term models may do better in high-volatility environments, but in normal conditions, longer-term models outperform. The podcast acknowledges that switching between time lengths based on volatility may be appealing but states that empirical evidence supporting its effectiveness is limited.
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