On Consolidation
When it comes to industry concentration, the real world may
be the darkest before the dawn: the best is clearly a monopoly / oligopoly with
rational players, whereby the pricing discipline will lead to long and profitable
up cycles + short and tepid down cycles. A more disadvantaged position is very
fragmented industries, whereby the lack of scale and financing will quickly
force marginal players out but leaves financially strong players relatively
in-tact, leading to a somewhat long up cycle + quick and somewhat short down cycle.
The worst kind is when the industry is reaches moderate concentration – when the
players are strong enough to weather heavy storms but pricing is not yet
disciplined. The up cycles in such case could be short-lived, while down-turns
get painfully dragged out as every player strives (and has the firepower) to
outlast each other. Beware the “consolidated” industries.
- Paraphrasing fiverocks19 on VIC.
On Path & Result
When you are in a hedge fund, the framework (draw-down, sizing limit, capital base) introduces path-dependency risk to the portfolio -- i.e. you gotta get the path right too, otherwise you get liquidated. This introduces a whole host of problems; because getting the result right is hard enough, but trying to get both path and result right is a whole other level that may not ultimately be better: it prevents one from good risk-reward but controversial situations, it discourages patience, and it distracts one from more important things (such as being right). If you can't take the mark, a lot of alpha goes away with it.
On Path & Result
When you are in a hedge fund, the framework (draw-down, sizing limit, capital base) introduces path-dependency risk to the portfolio -- i.e. you gotta get the path right too, otherwise you get liquidated. This introduces a whole host of problems; because getting the result right is hard enough, but trying to get both path and result right is a whole other level that may not ultimately be better: it prevents one from good risk-reward but controversial situations, it discourages patience, and it distracts one from more important things (such as being right). If you can't take the mark, a lot of alpha goes away with it.
