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Alpha Hunters and Beta Grazers.docx

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University of Manitoba
Management Info. Systems
MIS 4500
Pourang Irani

Reading 13 Alpha Hunters and Beta GrazersAcute inefficiencies discernible opportunities that can be exploited by accessible arbitrages surrounding uncertainties can be hedged or minimized resolution occurs quickly Chronic inefficiencies tend to be less discernible more ambiguous more resistant to rapid resolution from available market forces and generally longer tem in nature arise from structural and behavioral sources trading frictions organizational barriers imbalances in capital flows valuation ambiguities lack of catalysts for resolution convoy or herding behavior artificial peer comparisons rebalancing inconsistencies compulsive confirmation seeking filtering of conflicting data misreading of market signals inertia formulaic action plans and overly rigid policy portfolios Behavioral factors convoy behavior Bayesian rigidity pricetarget revisionism ebullience cycleconvoy behavior herding behavior of institutional fundsi Compounding consensus tendency to seek the opinions of other experts who can confirm ones own viewsBayesian Rigidity to relentlessly try to retain old views in the face of new informationPriceTarget Revisionism price movements in predicted direction tend to be taken as confirmation of wisdom and the target is extended to avoid have plan to reduce positions as the original target is approachedEbullience Cycle during up markets investors inclined to hold on firmly to winning positions shining examples of brilliance in down unopened envelope syndrome and propensity for inaction in the face of losing positionsPortfolio rebalancing behavior of holders rebalancers valuators and shiftersholders tend to leave envelopes unopened and positions unchanged in down marketsrebalancers investors who formulaically rebalance to policy portfolio allocation usually institutionsvaluators take positions based on whether market is cheap or rich and expect reversal also momentumshifters making fundamental moves from one strategic stance to another usually individuals after event like loss of jobMarket impactholders out of gamerebalancers have smoothing effectvaluators those who are contrarians and reversionists will act as moderators momentum investors will have exacerbating effectshifters exacerbate market movementsBeta investors buy indexes alpha investor chip away at chronic inefficiencies and behavioral biases
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