Tracking Error vs. Real Risk Debate

This episode explores how massive structural shifts—AI, deglobalization, and the rise of passive investing—are reshaping markets and what that means for investors.

Informed Momentum Company CIO Travis Prentice breaks down why 52 week highs don't mean what you think, the extreme dispersion beneath the surface of the market, why traditional definitions of risk may be flawed, and how investors should think about momentum, quality, and diversification in a rapidly changing environment.

Papers and Resources Discussed:

Risks Hiding in Plain Sight
https://www.informedmomentum.com/risks-hiding-in-plain-sight-how-the-dominance-of-passive-investing-is-reshaping-market-risk/

Is Quality Broken?
https://www.informedmomentum.com/is-quality-broken-ai-driven-disruption-is-testing-standard-definitions-of-quality/

Buy High, Sell Higher
https://www.informedmomentum.com/buy-high-sell-higher/

Topics Covered:

• The hidden divergence beneath index performance and why the market isn’t as stable as it looks
• Why value and momentum are working together—and what that signals about market broadening
• How AI and deglobalization are driving a major regime shift in markets
• Why momentum investors ignore narratives and focus purely on what’s working
• The structural risks created by the rise of passive investing and index concentration
• How tracking error replaced real risk—and why that may be dangerous
• Why quality stocks (especially software) are under pressure in the AI era
• The key insight behind 52-week highs as a powerful momentum signal
• Why buying stocks near highs works despite investor intuition
• How momentum strategies adapt to changing leadership and market regimes
• The importance of combining factors like value, momentum, and quality for long-term success

Timestamps:

00:00 Intro and major market shifts
01:32 Market divergence beneath the surface
03:00 Factor performance and broadening market trends
05:13 Why market concentration hurts factor investing
06:48 AI and deglobalization as structural drivers
08:14 Does this environment change how you invest?
11:02 Has the market sped up? Momentum implications
14:00 Passive investing and hidden structural risks
17:00 Tracking error vs real risk in portfolios
19:00 AI as a potential change agent for markets
21:09 How passive flows impact factor investing
24:00 What defines “quality” in factor investing
27:04 Why software and quality are under pressure
29:13 AI disruption and changing expectations
32:20 How to evaluate factor underperformance
34:35 Comparing today’s market to the 1990s
37:38 Buy high, sell higher: 52-week highs
41:00 52-week highs vs traditional momentum
43:20 Combining signals for better outcomes
46:00 Why 52-week highs improve downside protection
48:17 What momentum is picking up today
50:21 Misconceptions about momentum and growth
52:12 Timing and implementation of momentum
54:18 Momentum reversals and market behavior
57:17 Future research and improving momentum signals