Broadly defined, alpha represents the excess return of an investment relative to the return of a benchmark index. Over time, competition commoditizes alpha to a point where alpha disappears or becomes beta.
Traditional economic theory is a fragile, cloistered, and prosaic way of thinking about financial markets. Rational expectations of market efficiency treat alpha and beta separately: the expected return of an investment is linearly related to its risk. Conventional investment paradigms around risk/reward, capital asset pricing models and portfolio optimization are only useful when markets are at an equilibrium. However, equity risk premiums, arbitrage opportunities, and alpha-factors are non-stable and exist in the context of their market ecology.
Why is it the perfect time for this business to exist at scale? The most successful companies all had a compelling “why now.” These companies leveraged technological advancements and changes in consumer behavior.
Today, there are many new “why now” enabling opportunities. Software and hardware innovation are converging. Robotics, AR, VR, IoT, wearables, and quantum computing are on the horizon. New hardware will incorporate advances in ML and decentralized protocols.
There are dynamic social and cultural behaviors enabled by new demographics. Society is being shaped by technological tools and the economy it’s developing. As Marshall McLuhan puts it, “first we build the tools, then they build us.” Today’s consumers are more than digital natives. They are natives to on-demand services, personalized items, virtual goods, influencers, e-sports, and voice assistants.
There are many “Tech Predictions for 2019” articles for the new year. I’m not against them. Some articles are creative and intellectually rigorous idea mazes. But in reality, most of these future predictions may be just better reflections of the present.