The Best Business Model - Ever
Jan 15th, 2007 | Filed under: CAPM / Alpha TheoryThis is the third and final posting on Alexander Ineichen’s new book Asymmetric Returns. In it, Ineichen argues that alpha is the result, not of security-selection per se, but of downside risk mitigation. He rounds out the 300-page book with a discussion of the implications for asset managers and the future of alpha.
A License to Print Money
What is the best business model ever? Alexander Ineichen knows - and it’s not a hedge fund manager (at least, not exactly). Answer: a lottery. He calls a lottery “the best business model - ever.” In fact, Ineichen says that their extreme profitability is the main reason governments haven’t been able to keep their hands off them.
But why? Explains Ineichen:
“…cash flows are stable (since) the sample of fools buying lottery tickets is fairly stable…they already (presumably) know that their purchase is uneconomical from a probability-weighted expected return point of view.”
Ineichen goes on to explain that the “fools” to which he refers are really just players behaving uneconomically. Calling casinos the “second best business model ever”, he raises a point that is central to the argument that alpha actually exists. He says casino gambling losers aren’t really “losers” after all since they benefit from a “form of entertainment and sensation”. Regular readers will recognize this as being similar to the arguments put forth by Max Darnell and others to explain why alpha might be somewhat immortal.
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[…] With their perfectly-timed trains and neatly-arranged homes, the Swiss are big fans of symmetry. This makes UBS’s resident hedge fund guru Alexander Ineichen all the more of an anomaly. His book Asymmetric Returns has been garnering a lot of attention not because it espouses order and regularity, but because it so vocally challenges the status quo, refutes conventional wisdom and, well, questions symmetry itself. […]