Crossing Park Ave

Walking back home from work to my place the other day, I realized how I am starting to think all the time in hedge fund related  terms. I already had some weird analytic thoughts before, but I think it’s peaking after entering this industry. Sometimes I unknowingly end up thinking about the smartest way to do some regular things.

Whoever has been in NYC knows that walking around Manhattan is a science. Everyone seems to be racing heartlessly toward their appointments, looking ever busy. So, I found myself unknowingly thinking what the optimal way of crossing the streets was, balancing the risk of getting run over vs. the gain of valuable seconds.

The moment the white light (the equivalent of the EU’s green light) is on, everyone crosses. Following that strategy doesn't give you an edge over the pack in terms of time. However, some people cross while in red at their own risk. This second strategy brings both higher risk and higher returns in the form of seconds. These are both extremes of the spectrum of possibilities.

Nevertheless, the optimal strategy is to cross the street while in red, but closely following a person who already is crossing the street. While vile, this strategy allows you to minimize the risk of getting run over, as cars which see him will slow down by the time you are starting to cross.

In finance, this is the essence of “adding alpha”, as you are gaining excessive returns in compensation of a certain (overstated) risk borne.  These excessive returns arise from what others believe as risky, i.e. jaywalking. And since it is truly not as risky, but you’re still rewarded with a big amount of seconds over the pack, you are adding “free” returns.

It might be weird, but that was what I was thinking about while crossing Park Avenue ahead of the crowd in the NYC heat this Wednesday.