You are confusing ideas. The equilibrium is not towards zero profit. Every firm in the market has a different cost structure. The firms on the margin will be the first to drop out as profits drop. This in turn lowers supply and raises prices. Higher prices will eventually bring new firms to the market with better cost structures. The concept of zero economic profit simply means that a firm who has MR = MC has a choice to make. Is there another market or product that would entice them to produce since there is no incentive to produce when they reach their profit maximizing condition. At zero economic profit that is simply saying, no, there is no switch so they stay in their industry. All this stuff of course assumes lots of assumptions. For example if I make cars for a living and suddenly there is an industry where I could sell haircare products, I'm not going to switch over my factories from making cars to hair care products.
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Hedge Funds
- Thread starter dealmaker
- Start date
You are confusing ideas. The equilibrium is not towards zero profit. Every firm in the market has a different cost structure. The firms on the margin will be the first to drop out as profits drop. This in turn lowers supply and raises prices. Higher prices will eventually bring new firms to the market with better cost structures. The concept of zero economic profit simply means that a firm who has MR = MC has a choice to make. Is there another market or product that would entice them to produce since there is no incentive to produce when they reach their profit maximizing condition. At zero economic profit that is simply saying, no, there is no switch so they stay in their industry. All this stuff of course assumes lots of assumptions. For example if I make cars for a living and suddenly there is an industry where I could sell haircare products, I'm not going to switch over my factories from making cars to hair care products.
Haha well according to economic theory you would though right -the car factory and associated costs would be considered sunk. Therefore, if it was on a forward-looking basis more profitable to now create hair care products, you would. Remaining in the car business is the sunk cost fallacy.
As far as market speculation goes, the demand for speculation is driven by risk premia in a given market. Speculators enter a market when the risk premia is sufficient to compensate them for use of their resources with respect to time, risk and borrowing costs. As more and more speculators enter a market, the risk premia gets reduced and lowers the demand for speculation. Traders usually or "should" focus on markets with the largest risk premia. ET seems to violate this rule in spades. LOL.
Ha, need to hope speculators jump on the same wrong side (and you don't), and there's a nice market shock! (i.e. short squeeze, news, etc.)
Haha well according to economic theory you would though right -the car factory and associated costs would be considered sunk. Therefore, if it was on a forward-looking basis more profitable to now create hair care products, you would. Remaining in the car business is the sunk cost fallacy, forgot the name.
Well no, there are reasons to stay in the car business. One is specialization. Over time firms develop market specialization that allows them to generate a higher output per given unit of input. Switching industries would put them on the margin in the haircare industry meaning they have no unique specialization there and would be at a disadvantage to those that do.
For example if I'm a doctor and I've spent my whole life in medicine, and then someone comes along and says law is the place you want to be now. I have no experience in law but lots of experience in medicine. While it may be true that there are more opportunities in law, those with law skills will be best able to monetize them, not me. There is a tangible benefit to building specializations over time. Switching is usually a bad decision unless your industry is about to become obsolete. At some point the guy making buggy whips had to come to terms with the automobile and find another line of work.
Ah I assumed Ceteris paribus, but in your case it is not. Therefore, under your assumptions that would be correct. But CP, economically it would make sense to flow to the profitable biz and keep switching once profit become 0 (since no learning curve, etc.) Mathematically: X = -100,000 (sunk cost) +P1, Y=-100,000 + 3P1 you are going with Y assuming P>0.
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Ah I assumed Ceteris paribus, but in your case it is not. Therefore, under your assumptions that would be correct. But CP, economically it would make sense to flow to the profitable biz and keep switching once profit become 0 (since no learning curve, etc.) Mathematically: X = -100,000 (sunk cost) +P1, Y=-100,000 + 3P1 you are going with Y assuming P>0.
Profit is not becoming zero. You still keep thinking this. Do you think most of the companies in the S&P 500 are unprofitable? All of them are in competitive markets and their MR = MC. Yet most of them are comfortably profitable.
Rough life running a sub $25M fund, unless it's just you in your basement that's barely enough to cover costs.They need alpha. Ultimately that comes from less informed or less capable players which in the past has been retail. Still is. But there are fewer of them around. I don't think Ray Dalio is the best example but there are probably close to 10k hedge funds out there and 90% of them are under 25 million and small quant players. The top 10% though probably make up 80% of the total assets but as Sle said, they have morphed into portfolio managers. The smaller funds I know personally are all eating or trying to eat retailers. Most of them successfully still do.
Rough life running a sub $25M fund, unless it's just you in your basement that's barely enough to cover costs.
Agree, but it's not mathematically realistic for 10,000 hedge funds to all have 150 billion that Ray Dalio has. The top 10% (around 1000 or so) have assets over 500 million. The top 1% (100) over 10 billion. Rough estimates. Most hedge funds are really more appropriately emerging manager funds. And as we all know, most of them don't perform and in the long run, most of them don't survive.