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Whenever a strategy that worked for a while underperforms, there are explanations, and some of these explanations sound conspiratorial even though they describe real phenomena. If money is flowing out of long-biased discretionary investors (i.e. classic stock pickers who nodded along to One Up on Wall Street) and towards quants and factor-neutral multi-manager funds, the market gets more efficient within those factors but less efficient at accurately pricing different industries, factors, and countries. Citadel knows exactly how to measure the results of a strategy like "go long and short within the oil sector such that your portfolio doesn't respond to changes in the S&P, rates, oil, value, momentum, etc., but does capture when Exxon is trading at a premium to Chevron or when not every analyst has updated their numbers for some midcap midstream player." They don't have a good way to pay people to answer questions like "when will oil production really peak?" or "Will European stocks converge on US valuations, and, if so, which side moves?"

And that's understandable; there are plenty of socially-valuable questions that markets are adjacent to but can't answer. But it also means that for people who do bet on these kinds of broad trends—and I say this as someone whose biggest positions are European small-caps that are trading at steep discounts to US-listed peers—there's a lot of frustration-driven discussion of why valuation gaps won't close. And it goes something like this: in any given year, the long-only discretionary fund manager with a generalist mandate is probably going to get net redemptions, and more of that money will flow to pod shops. The 22-year-old who, a few decades ago, would have apprenticed at such a fund is now going to work for a pod shop, where they will know everything they can legally know about ebbs and flows in the semiconductor capital equipment supply chain, and how to translate those into short-term trades, but who can't afford to spend much time thinking about what the long-term fair value of ASML is. Each time those shifts happen, the pod shops earn incremental alpha because the next dollar flowing into that strategy goes into trades quite similar to what existing funds have on, and the dollar that flows out of older strategies makes those strategies perform a bit worse, making the next round of redemptions a foregone conclusion.

And that kind of cycle can go on more or less forever, leaving an equilibrium state where there are forgotten cheap industries, and where all the action and alpha generation happens somewhere else.Maybe eventually those multi-manager funds run out of counterparties who aren't precisely as well-informed as they are, but that takes a long time.

What stops this from happening is that the market is not the whole system, just part of the system. Companies can also tell if their shares are cheap, governments get annoyed when their stock market underperforms over extended periods for poorly-justified reasons (and the smart ones get nervous when their market is showing signs of irrational exuberance, though that's rarer). And private equity doesn't really care about factor loadings or size bias—if they can buy up small, cheap companies, they will. Of course, all of this requires someone to act, and compared to the speed at which public markets respond to new information, the pace is glacial.

But that also means that there's a long period where the trend is obvious and the alpha is still abundant. In an environment where there are lots of cheap stocks that would be worth more to a private owner, activists can clean up fast—they don't need to buy the entire company (though it always helps to be able to make a credible threat to do so!). If they're constrained because they don't want a reputation for railroading management, they have a symbiotic relationship with activists: the activist buys enough stock to get the board to form a special committee seeking an acquirer, and that acquirer gets to rescue the company from an aggressive activist who keeps writing nasty things in 13Ds.

Meanwhile, companies make their own funding or even strategic decisions based on what the market is telling them is valuable, and one way to know the market is mistaken is to look at how many companies pivot just before an IPO—there are a lot of companies that discovered, some time in the last few years, that they were AI businesses all along. Some of them had previously made similar journeys of self-discovery in crypto and cannabis. (This isn't a perfect heuristic, because some of the companies that converted electricity into money by way of Ethereum and GPUs are now converting electricity into money by renting those GPUs to AI businesses.)

This is one of Matt Levine's theories of WeWork: Adam Neumann spotted a big funding bubble, and found the most efficient way to exploit it, by taking an existing asset that he could buy at a real estate multiple funded by equity he raised at a startup multiple. This drew money away from better companies in a sense, but the money it was going after probably would have ended up in some other business with similarly bad returns on capital. What WeWork accomplished was to speed up this process and make it more visible—someone who ruthlessly exploits a poorly-justified bubble is basically an efficient markets accelerationist who is heightening the contradictions and pushing the system towards its inevitable collapse as a side effect of their effort to get rich quick at the expense of others.

You can think of the people who take advantage of these cross-market efficiencies as being protagonists in the story of finance, whereas the people operating solely within the logic of the specific market they trade are more like extras. Your typical story has more minor characters than main characters, and those minor characters perform important roles. But many of them get replaced from time to time. But in the long run, markets need people who step back from the game to play the metagame, figure out what doesn't make sense about the entire environment they're operating in, and then find the trade that closes that inefficiency at a profit.

In The Diff, we're often looking at ways that market participants do this kind of perspective shift, including:

• We've looked at how many careers start off in arbitrage, and how many people who are successful today had a crippling videogame habit in the past.

• Corporate M&A in tech has to predict the future competitive environment better than regulators can ($).

• Big financial insights tend to lead to one-time wins rather than repeating ones.

• The modern private equity business is descended from one specific bond market-making desk.

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