GMOs Mean Reversion Strategy Is Testing In Today's Markets
Mean reversion works by trying to find times when certain markets are overextended to the upside or the downside. A mean reversion strategy would avoid markets that are overextended to the upside and buy markets that are overextended to the downside. They work because markets are constantly forming bubbles that subsequently burst. While this sounds intriguing, there is a problem. Bubbles can go for a long time before they burst so mean reversion strategies can be on the wrong side of things for a while until they ultimately pay off.