In the blog post titled: Get Ready for the most turbulent market period you'll ever see! , I used Ray Kurzweil's abstraction of Moore's Law to explain how exponential technological progress, would cause 'strange' behaviors in financial markets (How? Answer: by accelerating information flow and the informational efficiency of financial markets).
...Moving on
The key prediction made by Kurzweil in his abstraction of Moore's Law: there will be more technological breakthroughs in the next 20 years, than in the entire 20th century. This naturally implies that there is an accelerating pace of change in the global environment (spearheaded by exponential technological progress).
...Moving on
The key prediction made by Kurzweil in his abstraction of Moore's Law: there will be more technological breakthroughs in the next 20 years, than in the entire 20th century. This naturally implies that there is an accelerating pace of change in the global environment (spearheaded by exponential technological progress).
...The Agency Dilemma
In his paper series on Agency Costs, Michael Jensen stated that the 'agency-gap' increases greatly in times of rapid technological (and political) transformation. Otherwise stated: In times of great technological progress, there is great divergence between the interests of shareholders and management.
Given the observed exponentially increasing pace of technological change; it is safe to assume that there will be many listed firms with increasing divergence between shareholders' and management's interests.
It is this misalignment of interests that will make a certain hedge-fund strategy the most profitable (and relevant) strategy within the next two decades.
But before we explore the strategy; what are the interests of shareholders & what are the interests of managers?
How do you identify these firms? Answer; stay tuned, I'll disclose the details in bits and pieces found in future posts. :-)
Given the observed exponentially increasing pace of technological change; it is safe to assume that there will be many listed firms with increasing divergence between shareholders' and management's interests.
It is this misalignment of interests that will make a certain hedge-fund strategy the most profitable (and relevant) strategy within the next two decades.
But before we explore the strategy; what are the interests of shareholders & what are the interests of managers?
- Shareholders: Generally want to see growth of their investment; growth of dividends, profits, cash-flows and share-price. In short, shareholders seek value, regardless of firm size.
- Management: Generally have incentives to cause their firms to grow beyond the optimal size. According to Michael Jensen: 'Growth increases managers’ power by increasing the resources under their control. It is also associated with increases in managers’ compensation, because changes in compensation are positively related to the growth in sales'. Managers generally use the firm as a tool for self-aggrandizement, and in most instances, this compromises the welfare of the firm (if left unchecked).
...Which hedge fund strategy? Answer: short-selling the stock of firms that have a great divergence between shareholders' and management's interests.
How do you identify these firms? Answer; stay tuned, I'll disclose the details in bits and pieces found in future posts. :-)
