Author: tom_anichini
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Flash, substance, and Occam’s Razor
What is the proof that some new application is better than the alternatives? After the Berlin Wall fell, demarcating the end of the Cold War, the financial world saw an influx of rocket scientists. Former engineers, physicists, and NASA scientists flooded Wall Street, the hedge fund world, and the managed futures world. I suspect they…
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Meta Questions on Evaluating Investment Processes
At its essence, due diligence on any investment strategy is aimed at answering whether the existing record is repeatable. Better said, when will the strategy be likely to perform well, however you define ‘well’. Decades of empirical evidence suggest that all investment styles episodically have their day, so after a while you begin to dismiss…
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Real World Problems versus Homework Problems
Supposedly, one of the reasons so many statistical analysis have been conducted on financial markets is because that’s where the data is. Millions of finance students have learned how to apply financial models using historical data from the real world. However the problems they solved were homework problems, not real world problems. Real world problems…
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There IS a name for that: “Reconstructed” portfolios
In several posts I have struggled to articulate the mathematically convenient concept of a historical representation of an index or portfolio as if its past weights had always been equal to its current weights. I have called the returns to such a time series various terms, including “matrix returns,” “imaginary returns,” and “pro forma returns.”…
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The Inequity of Long-only Performance Fees
The stereotypical hedge fund fee structure is “2 and 20,” meaning a 2% fee on assets plus 20% of the gains. Typically gains are calculated above some threshold, particularly a high water mark. The purpose of the high water mark is to ensure the manager doesn’t get paid an incentive fee twice following periods of…
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If you’re not rebalancing, you’re not diversifying
My brother, not an investment professional, recently asked me whether he ought to rebalance his 401(k) portfolio. The short answer: “Yes!” One of my first projects after business school had to do with assessing the effects of different hypothetical portfolio weighting and rebalancing schemes in an international equity portfolio, using EAFE countries. Tricky to do…
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Strategy implementation: Investing discipline or investing habit?
Over the past 20 years I have spent much time meeting, researching, interviewing, and otherwise picking the brains of traders and investment managers. Most of them could talk your ear off about their discipline and the rationale supporting it. Ultimately, any investing or trading discipline requires that you recognize your edge and execute your strategy…
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Arithmetic Means and Expected Returns: Don’t Fool Yourself
(Author’s note: This year I have volunteered to coordinate the Society of Actuaries (SOA) Investment Section’s sessions at the SOA annual meeting, which will be held this October in Chicago. For more information, visit the SOA annual meeting website). At this year’s Society of Actuaries’ annual meeting, one of the more anticipated discussions is likely…
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Another Reason Not to Watch CNBC When the Market is Open
Stocks seem to earn their returns when the market is closed. When you compare the returns on stocks overnight to the returns intraday, overnight dominates. You really don’t want to know how bad the performance is during the day. While you’re unlikely to profit by this finding, Eric Falkenstein recently documented the size of the…
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EDHEC Efficient Equity Indices and Benchmarks
Yesterday I attended a presentation by EDHEC on their Efficient Equity Indices and Benchmarks. Efficient Indices (EI) are a family of equity indices EDHEC created that are alternatives to market capital weighted indices (MCI). One of the most well-known family of non-MCI is Research Affiliates Fundamental Indexes (RAFI), which bases its asset weights on fundamental…