Breaking The Market on Ergodicity Economics and Geometric Rebalancing

Mar 30, 2021

This is “ReSolve’s Riffs” – live on YouTube every Friday afternoon to debate the most relevant investment topics of the day.

“Drink once every time someone says "rebalancing", twice for "geometric", thrice for "ergodicity". Leverage these amounts by 2.7x for the full Kelly experience”. This was the opening salvo from our guest, the once anonymous author of the popular Breaking the Market Blog, now revealed as Matt Hollerbach (founder of Pronghorn Analytics).

With a background in mechanical engineering, he has applied his analytical and mathematical background to challenge a variety of once-sacred investment beliefs, generating thought-provoking articles that have prompted wide-spread discussion.

Our conversation included:

• Disillusionment after the Great Financial Crisis and delving deeper into the entropy of markets
• Geometric returns and rebalancing metrics, and why they matter
• The case for a faster and more frequent update of a portfolio’s underlying assumptions
• Efficient Frontier versus Geometric Frontier
• Similarities and Differences between Risk Parity and Matt’s Geometric Rebalancing approach
• Ole Peters, ergodicity and why stock markets should be “stochastically efficient”
• Adapting to the vol of vol
• Stress versus Strain
• Margin of safety and Kelly-optimal bet-sizing

Matt also explained the underlying mechanics of his strategy, and shared some of his favorite return metrics and other insightful concepts borrowed from various disciplines. If you’re planning on grabbing a drink to play along, make sure it’s not too strong.

Thank you for watching and listening. See you next week.