Submitted by Adriana Knouf on
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'Yes, you want to be in an inefficient market, with “noise-traders”—people who believe that they have some skill but they really don’t. A great time for stat-arb was during the inflation of the internet bubble, because so many people, so many average retail investors decided “I’m a stock market genius!” They were just crazy, they were just noise-traders that were creating a lot of distortion. They were sloppy in the way that they traded, and they were also doing things that were just foolish and that created a lot of anomalies that stat-arb guys were able to exploit. After the internet bubble collapsed, that next year was a much tougher year for stat-arb because those noise-traders were gone. It’s sort of effectively functioning like the house in the casino, the gamblers are all like that, when there’s more of them you do well.'
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