Alpha is Dead, Long Live Alpha

Suicide King by Aaron Francione

So the lore goes that back in the late 1970s, during the early days of his tenure, a famous New England based money manager would receive quarterly reports from public companies via Fax.

This sounds quaint but at the time it provided him with an informational advantage for a day or two as most fund managers received corporate reports via snail mail.

Alpha Is Dead

A lot has changed since then.

The majority of informational alpha has been wrung out of equity markets, so it is a completely different game. 

The internet delivers information to everyone quickly and there is no end of smart if similarly equipped analysts digging in.

Where there were once blunt asymmetries that might last days, there are now few that might last microseconds.

Here is a chart Michael Mauboussin posted to Twitter displaying the steady decline in alpha for US large cap equity mutual funds over the last 50 years.


To make matters worse, there is an abundance of talented participants these days. Mauboussin applies the term Paradox of Skill to describe how the active managers who survive are all so good that the gap between the best and the average has actually compressed.

Long Live Alpha

While the easy alpha has been squeezed out of equity markets, things seem very different across the blockchain technology investment landscape.

Discussing this with Dave Nadig the other day, he summarized it succinctly,

While the informational edge — knowing things about specific securities that other people could know, but don’t — is largely gone from the securities market, it’s alive and well in Crypto.  

First, this is a new market – 10 years old at most so there is no canon. There is no Graham and Dodd etc.

Second, blockchain technologies are very different from equities and the skills required to conduct investment analysis are far more scarce. How many have really dug in?

Third, blockchain technologies and the environment in which development is occurring is changing rapidly, so all targets are moving.

Informational alpha may be more pronounced for those with the skill and the will to go deep.

The Formative Era

This is a timely discussion, because, at this moment, we are in a formative era in the evolution of blockchain technologies.

If Satoshi’s whitepaper was the big bang, we are now in the era when the blockchain universe is taking shape. 

Galaxies are forming.

Developer communities are arising out of the cosmic dust and organizing around specific technologies. 

The winners have yet to be determined, though they are being determined as we speak. 

Over the next several years, there might be many fewer technologies, and the conquerors will be the Web3 winners.

Kinda like how Amazon and Google won Web1.


Thanks Bill Birmingham, Michael Batnick and Dave Nadig for helping me think through this!