Is a positive alpha in an efficient market evidence of illegal activity?
I don't think so. There is nothing in the efficient market theory that says that an investor cannot earn positive alpha. In fact it is entirely possible for an investor to beat the market for many years in a row. Market efficiency just says that the reason for the investor's success was luck, not skill.
Here is an example of being "lucky" for 13 years in a row:
ReplyDeletehttp://www.crystalbull.com/stock-market-timing/CrystalBull-Trading-Indicator-History-chart
If the market were truly efficient, Goldman Sachs would not make any profit in their proprietary trading.
Three points:
ReplyDelete1. Truly efficient markets don't preclude someone from being lucky 13 years in a row, although this would be unlikely.
2. The proprietary markets that GS is trading in are not necessarily completely efficient. Because of Goldman's market position, they have an almost unprecedented view of information flows. This enables them to generate abnormal profits.
3. I am not sure what the link is supposed to show, apart from the fact that anyone can design a trading model that works well on historic data.