Where did you develop your thinking on active management? Wednesday 24th January 2018

In the very first finance class at business school, my class was shown statistical evidence of efficient markets and the benefits of diversification. Then I got a trading internship at Goldman Sachs, and was told: “This trading floor is a temple to inefficient markets”. This dichotomy intrigued me.

At the same time, passive funds were gaining recognition because active funds were charging more, and yet underperforming the index. Finally, I learned that options are priced using models that rely on statistical random walks. And their pricing works- they end up close to where they should be. The option pricing model is pretty good; and it tells you the future is random.

So you have stock traders and fund managers who try to predict the future price movements of assets, and option traders who rely on the fact that prices cannot be predicted- the same dichotomy.

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