Trading strategies face several limitations that experts have discussed in various podcasts:

1. Risk Limits: Traders often have preset risk limits that they cannot exceed without authorization. These limits are essential for managing potential losses, but can also curb trading opportunities during high market volatility 1.

2. Technology and Arbitrage: In quant investing, there's a constant balancing act between identifying inefficiencies and arbitraging them away. As more traders exploit these inefficiencies, the profits diminish, leading to a point where the strategies no longer provide significant benefits 2.

3. Principal-Agent Conflict: In value investing, the principal-agent conflict can result in short-term human behavior interfering with long-term strategies. Investors might pull capital too soon, preventing the exploitation of long-term anomalies 3.

   

   1

   Streamlining Risk Limits

   00:12:15

   

   2

   Limits of Quant Investing

   00:40:27

   

   3

   Value Investing Challenges

   00:38:50

   

   4

   Market Limits Explained

   00:27:21

   

   5

   Market Limits and Reversals

   00:33:13

4. Scale Limits: Every trading strategy has a maximum scale at which it can operate effectively. Larger trades can impact market prices, reducing the strategy’s efficiency. This is particularly significant in smaller markets or with less liquid assets 4.

5. Market Dynamics: Market reversals and the limits on incremental contributions to strategies like passive investing can cause disruptions. When inflows switch to outflows, prices can become discontinuous, leading to increased volatility and potential losses 5.

Understanding these limitations is crucial for developing robust trading strategies that can adapt to changing market conditions and manage risk effectively.