Management styles and efficiency of financial markets

The different asset management styles and strategies are related to the different perceptions of how efficient the financial markets are.

A financial market is efficient when the market price of a financial asset is an unbiased sample of all opinions about its intrinsic value. The market consensus on the value of that asset is what sets its price. For a market to be efficient, there must be no asymmetric information and all available information must be quickly incorporated into the price of financial assets. 

When an analyst looks for investment opportunities, he implicitly believes that there is information asymmetry, the information is not incorporated quickly enough in the market, or he has better analysis models than the market. Therefore, the analyst thinks that the market is not efficient enough in setting the price that corresponds to the true value of an asset. Interestingly, the more market participants believe that a financial market is not efficient, the more it is. 

Something similar happens with technical analysis, as it is believed that the price of an asset itself contains information about patterns and that it is possible to have an advantage in this type of analysis. 

At the other extreme, we have indexed asset managers, which believe that it is not worth the effort to search for mispricing assets because the market is efficient enough. For indexed asset managers, investing in a basket of assets that track a certain financial markets or asset class is the best option in terms of returns and costs.

José Luís Álvarez – CEO HollyMontt

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