In Part I of this series, we explored Grinold’s Fundamental Law of Active Management, and why the theory leads to misguided conclusions in the presence of asset correlations. In this article we will offer a primer on a useful tool for portfolio evaluation, Principal Component Analysis (PCA), and illustrate how PCA can help quantify the number of independent bets in a portfolio of correlated assets.
Keep Reading2015
Experts Aren’t Helpful, and Other Useful Lessons From “DIY Financial Advisor”
We draw a significant amount of inspiration for the material we cover on this blog from the publications of our financial brethren. Unfortunately, given the non-stop firehouse of information that increasingly characterizes the digital age, it’s nearly impossible to consume anything longer than a blog post. So it’s noteworthy that we were inspired to read – cover to cover – Wes Gray, Jack Vogel and David Foulke’s most recent book, DIY Financial Advisor.
Keep ReadingTactical Alpha: Theory & Practice (Pt. I) Fundamental Law of Active Management
While some investors make active decisions on their own, many investors delegate their active bets by hiring active stock and bond investment managers via the purchase of funds or Separately Managed Account (SMA) mandates.
Keep ReadingApples and Oranges: A Random Portfolio Case Study
This article was motivated by a provocative discussion with a thoughtful RIA. Let’s call him Harry.
Keep ReadingEmpirical Finance: Meeting Fiduciary Standards Through Skepticism, Not Cynicism
We firmly believe that the scientific process is alive and well in empirical finance, and that HLZ’s guidelines are an excellent example of the process at work. Financial practitioners should evaluate research with a healthy skepticism, and an awareness of the implications of data mining.
Keep ReadingGTAA Delivers Solid Returns at Lower Risk. Period. Just the Facts, Part 4
Now that we have specified the most appropriate benchmark, we can get down to the business of evaluating how well GTAA strategies have performed. How should we judge success? We submit that for GTAA strategies in particular we should judge results on …
Keep ReadingAll Strategies Blow Up
We are a quantitative finance shop, right down to the ground. All of our portfolios are driven by supervised quantitative models with no discretionary intervention. As such, I was inspired to respond to a recent article on the risk of quant strategies, as I think the way our team approaches quantitative research diverges from how many outsiders perceive quant, and also from how many quantitative shops work.
Keep ReadingGTAA – Why VBINX is the Wrong Benchmark? Just the Facts, Part 3
One of the most common failings of the investment industry is the prevalence of poorly specified benchmarks. This is of critical importance because it’s easy for a knowledgable but disingenuous professional to manipulate the facts in order to…
Keep ReadingGlobal Tactical Asset Allocation Is More Than Just Market Timing – Just the Facts, Part 2
In Part 1 of this series we explored why quality TAA strategies do not rely on ‘expert’ market calls, noting that the terms ‘discretionary’ and ‘tactical’ ought not to be viewed as two sides of the same coin. Rather, the best tactical managers increasingly …
Keep ReadingGlobal Tactical Asset Allocation: Just the Facts, Part 1
We recently came across a couple of articles making the sensational claim that TAA is nothing more than a repackaged and dressed-up version of market timing. Both articles – and others, we’ve subsequently learned – point to a …
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