Contrary to conventional wisdom, the massive flow of capital into passive indexes and short-term systematic strategies has reduced the number of actors focused on long-term fundamentals. This creates price dislocations and volatility, offering alpha for patient investors.

Contrary to popular belief, the market may be getting less efficient. The dominance of indexing, quant funds, and multi-manager pods—all with short time horizons—creates dislocations. This leaves opportunities for long-term investors to buy valuable assets that are neglected because their path to value creation is uncertain.

Passive, cap-weighted fixed income funds behave like momentum traders, buying more of a bond as its price rises. This is a flawed strategy for fixed income because many bonds are callable, meaning their upside is capped and rising prices increase call risk. Active management can exploit this inefficiency.

An estimated 80-90% of institutional trading is driven by quant funds and multi-manager platforms with one-to-three-month incentive cycles. This structure forces a short-term view, creating massive earnings volatility. This presents a structural advantage for long-term investors who can underwrite through the noise and exploit the resulting mispricings caused by career-risk-averse managers.

Today's markets are less efficient because the dominant players—passive funds, retail traders, and short-term quants—do not invest based on long-term fundamentals. This creates a significant arbitrage opportunity for investors who are willing to focus on a company's intrinsic value over a one- to three-year horizon, a timeframe now largely ignored.

Unlike discretionary managers with narrow focus, a systematic process has a view on every bond continuously. This allows it to act as a liquidity provider—trading opportunistically when others are forced to transact—and capture implementation alpha, effectively being 'paid to trade.'

Contrary to classic theory, markets may be growing less efficient. This is driven not only by passive indexing but also by a structural shift in active management towards short-term, quantitative strategies that prioritize immediate price movements over long-term fundamental value.

Contrary to fears that a liquid ETF wrapper around illiquid bonds would create a dangerous mismatch, fixed-income ETFs have become a flywheel, accelerating the modernization of bond trading and making the underlying credit markets more liquid, not less.

To achieve excess returns, one must buy assets for less than they are worth. This requires finding a seller willing to transact at that low price—someone making a mistake. These mistakes arise from emotional biases, forced selling due to mandates, or misunderstanding complexity, creating bargain opportunities for disciplined, “second-level” thinkers.