Safehaven | In The Beginning There Was Alpha

May 31, 2009

In The Beginning There Was Alpha
by Mack Frankfurter

Hear then, o Economidae, nymphs of the streams
Of infinitely discussed yet discounted prophets,
Of the story which I sing: the epic of men
And women locked in the battle of egos and coherence,
Precision and relevance, the song for all ages
And peoples to hear and revere the great and poor
Deeds of this tribe of malcontents and heroes...
--The Walrasiad, Prologue

In The Beginning There Was Alpha
Epilogue to "The Walrasiad"

In the beginning, Man created the markets. The markets were without form and void, and darkness was over the faces of analysts. And Man said, "Let there be Alpha," and there was Alpha. And Man saw that Alpha was skeptic. So Man created Beta from Alpha so that he may have faith. Thus it was that Beta evolved from the aggregate of individual Alpha decisions.

In time Man affirmed that Alpha is only a derivative of Beta and not unto itself. Thus it was Alpha's fate to be banished to the farthest corners of the market where it thrived little noticed in the wilds of commodities and forex, and strange unknown strategies.

And so it came to be that Beta ruled the markets for many generations and organized itself around the concept of rational agents and equilibrium. And those who claimed to be Alpha were really leveraged Beta or Alpha corrupted by money flows into exotic Beta. And Man saw it was good.

But alas, Man was not happy in his greed and sought more leverage and converted evermore Alphas from the wilds with the trap of untold assets under management. And thus, Beta's down-fall did come about, as Man did not recognize that faith and greed is cause for disequilibrium. Soon the wisdom of crowds became the madness of crowds, and all was chaos in the markets.

This was the way of the markets when the few remaining Alphas, the true skeptics, whose only heresy was to saith that economic agents are irrational and the natural order of the markets is disequilibrium, returned from banishment and did cause great wealth for their kind.

Thus it was that "true" Alpha in its actions restored the equilibrium. From then on it was said by Man that Alpha seeks madness in the wisdom of crowds and wisdom in the madness of crowds.

Hence, price discovery is yin-yang, as is wave-particle duality. In truth, all Man's philosophies reveal this dichotomy as Man is trapped in the observer effect, prisoners of the box in which Schrodinger placed his cat. Ergo, the universe is akin to True Beta and just a huge mechanism for price discovery on a quantum level. And Man saw that creative destruction was good.

Michael "Mack" Frankfurter
Managing Director, Operations
Cervino Capital Management LLC

Every effort has been made to ensure that the contents have been compiled or derived from sources believed reliable and contain information and opinions, which are accurate and complete. There is no guarantee that the forecasts made, if any, will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. This material does not constitute a solicitation to invest in any program offered by any commodity trading advisor mentioned in the article including any program of Cervino Capital Management LLC which may only be made upon receipt of its Disclosure Document. Past performance is not necessarily indicative of future results. Investment involves risk. Investing in foreign markets involves currency and political risks. The risk of loss in trading commodities can be substantial.

Author's Background:
Michael "Mack" Frankfurter is a co-founder and Managing Director of Operations for Cervino Capital Management LLC, a commodity trading advisor and registered investment adviser based in Los Angeles, California. Mr. Frankfurter is also the Chief Investment Strategist and an Associated Person of Managed Account Research, Inc., an independent Introducing Broker focused on advising its clients in managed futures investments. In addition, he is a Managing Partner of NextStep Strategies, LLC which provides consulting services for companies in the financial industry. Occasionally, he pens articles as a freelance financial writer.