An “edge” is any repeatable advantage that lets a strategy earn more than random chance would predict. Edge decay is the tendency for that advantage to weaken over time — often precisely because it worked and others noticed.
The self-destroying prophecy
Suppose a genuine inefficiency exists: some asset is reliably mispriced. A few traders find it and profit. Word spreads. More capital floods in to capture the same mispricing. But that very flood of trading pushes the price toward fairness — erasing the inefficiency that made it profitable. The edge consumes itself.
This is the practical face of “market efficiency”: markets aren’t perfectly efficient, but they’re efficient enough that obvious, well-publicized edges rarely last. The easy money is competed away.
Our Funding Rate Arbitrage test is a textbook case. The edge was real in earlier years, then compressed by roughly 42% on recent data — most likely because the strategy had been widely published since 2021 and capital crowded in. The anomaly didn’t vanish by magic; it was traded away.
What survives
If obvious edges decay, what’s left? Usually edges that are hard to access, hard to scale, or structural — tied to something that won’t simply be competed away. Our working philosophy: efficient markets destroy fantasies, and the job is to find the small inefficiencies that survive contact with reality.
An edge that everyone knows about is usually an edge that no longer exists. The valuable ones are the ones that resist being copied.
- 1An edge is a repeatable advantage over random chance.
- 2Publicized edges attract capital that trades the advantage away.
- 3Durable edges tend to be hard to access, hard to scale, or structural.
edge decay — the root cause in our Funding Arbitrage verdict.