|
|
On 7 July 2014, the New York Times ran a feature story on James H. Simons, the well-known geometer, hedge fund founder, billionaire and philanthropist. Here are some of the fascinating facts uncovered in the Times story and elsewhere:
Simons was born in 1938 in Newton, Massachusetts, the son of a shoe factory owner. Simons graduated from the Massachusetts Institute of Technology in three years, then received his Ph.D. in mathematics from U.C. Berkeley in three more years, finishing at the age of 23. Simons worked on cryptographic mathematics at the Institute for Defense Analyses in Princeton, New Jersey, but
Continue reading New York Times features story on James Simons
On June 5, Mary Jo White, Chair of the U.S. Securities and Exchange Commission, sketched some proposed changes to regulate high-frequency trading (HFT). Her full speech is available from the SEC website. Some analysis can be read in the New York Times and Bloomberg News.
Synopsis of White’s comments
White surprised many observers by stating that investors are doing better in the algorithmic trading regime today than they did in the “old manual markets.” She noted that for institutional investors, the cost of executing a large order is roughly 10% lower than in 2006, and the spreads between bid and
Continue reading SEC to propose new rules for high-frequency trading
As we emphasized in a December 2013 Mathematical Investor blog, individual investors are not very well equipped, and certainly not very effective, in managing their own investment portfolios.
This is unfortunate, because fewer workers than in the past, particularly in the U.S., are covered by a “defined-benefit” retirement system, namely a pension that guarantees a certain proportion of one’s income at retirement, based on the number of years in service, in perpetuity until one’s death. Instead, the majority of the growing army of American baby boomers (according to the Population Reference Bureau, 76.4 million Americans were born in the period
Continue reading Latest DALBAR report underscores poor long-term performance of individual investors
Many investors, individual and institutional, have come to the conclusion that index-linked investments are a rational and, in the long term, profitable investment strategy.
It is certainly true that many individual investors could do far worse that merely investing, say, in a S&P500 index fund or exchange-traded fund (ETF). As we described in a previous Mathematical Investor blog, the typical U.S. equity investor has significantly underperformed the S&P500, with similarly dismal results in other asset categories. In particular, the average equity investor has a 20-year return of 4.25% per annum, compared with a 8.21% average return of the S&P500, for
Continue reading Do new backtested index ETFs outperform the market?
Recently two books have appeared that highlight “dark pools” (i.e., new trading venues that permit one to keep trading activity relatively private, at least for a limited time), and “high-frequency trading” (i.e., trading performed by computer algorithms and keyed to very fine-grained time intervals):
Dark Pools
Dark Pools (2012). Scott Patterson, a staff reporter for the Wall Street Journal, introduces the reader to computerized trading algorithms, then recounts the history of the emergence and proliferation of independent trading venues and computerized trading. We learn about the many small firms that rose to prominence — e.g., Island, Instinet, Archipelago, Datek, Getco, Tradebot
Continue reading Review of “Dark Pools” and “Flash Boys”
A recent Globe and Mail blog repeats an oft-cited claim that the U.S. stock market is weaker in mid-term election years (MTEYs). According to this blog, stock markets “have traditionally been weaker than normal during mid-term election years. Price returns during these four-year cycle lows have been atypically negative in January, but then frequently favorable in February. What’s more, March also typically posted an gain, just before a string of sub-par performances from April through September, with two-thirds of these months recording average declines.”
This is, in fact, one version of the presidential election market cycle theory first proposed by
Continue reading Is the stock market weaker during mid-term election years?
Our recent papers [1,2] on backtest overfitting have attracted significant interest, including several press releases [American Mathematical Society, Science Daily, University of Newcastle] and news articles [Financial Times, Wall Street Journal, Bloomberg, Barron’s, Pacific Standard, Morningstar, Seeking Alpha]. The feedback so far has been encouraging, and numerous colleagues have approached us with interesting questions and requests for clarification. This blog lists and responds to a number of these items.
1. Why do so many quantitative investments fail? In the 21st century, we are surrounded by math and algorithms designed to filter noise out of signal. Why is it that the same science
Continue reading FAQs on backtest overfitting
The rise of quantitative investing
With the dramatic increase in computation power available in recent years, quantitative methods are gaining momentum in the finance world. The results, however, are mixed. The Renaissance Fund, founded by brilliant mathematician James Simons, has produced an average annual return of 35%, after fees, over a period of 25 years. Yet other quantitative funds have failed, sometimes miserably. Solid, mathematically-driven investment methods are as profitable as they are scarce!
The public rarely learns about the highly successful funds or has the opportunity to invest in them. Unfortunately, the void between the public and highly scientific investment operations is
Continue reading Pseudo-mathematics and financial charlatanism
CXO’s evaluation of forecasters
The CXO Advisory Group of Manassas, Virginia, which offers “objective research and reviews to aid investing decisions,” has just published an interesting evaluation of equity market forecasts. Titled Guru Grades, the column concludes that the class did not do very well!
CXO evaluated a total of 6582 forecasts for the U.S. stock market, published by 68 different market experts, over the years 2005 through 2012. These forecasts were limited to publicly published predictions (i.e., not in private newsletters), and excluded forecasts that were judged too vague or too complex be reliably evaluated.
The results were not
Continue reading A sobering analysis of financial gurus’ market forecasts
On Wednesday March 26, 2014 at 11:15am Marcos Lopez de Prado and David H. Bailey, two of the bloggers on this site, jointly presented a talk How to spot backtest overfitting at the Battle of the Quants meeting in New York City.
The Battle of the Quants conferences, organized by Bartt C. Kellerman of Global Capital Acquisition, are held regularly in New York City, Shanghai and London. They gather together academicians, asset managers and other professionals in the area of quantitative finance and investment.
The viewgraphs of the talk by Lopez de Prado and Bailey are available here. Their talk
Continue reading Lopez de Prado and Bailey speak at “Battle of the Quants”
|
|