Practical analysis for investment professionals

Series


Dumb Alpha: How to Build an Above Average Hedge Fund

Joachim Klement, CFA, demonstrates a method for beating average hedge fund returns — without the fees. It's the best dumb alpha can offer: a simple, low-cost investment strategy that outperforms more sophisticated and expensive alternatives.

Dumb Alpha: Sell in May and Go Away?

If the sell-in-May effect holds true, investors can outperform a simple buy-and-hold strategy by selling stocks at the beginning of May and buying them back at the beginning of November. But does the so-called Halloween indicator actually work?

Dumb Alpha: Don’t Get Carry Traded Away

Carry trades profit from investor herding just like momentum strategies. As more and more investors pour money into high-interest currencies and borrow on low-interest currencies, the demand for the former rises. This herding behavior can continue for quite some time, but it comes to a halt when investors are no longer willing to invest in high-interest currencies.

Dumb Alpha: Accelerating Momentum

Momentum investing can seem like an insult to your intelligence. Why should prices go up just because they have gone up in the past? But there is plenty of evidence that momentum investing works in the medium term.

Dumb Alpha: The Drawbacks of Compound Interest

With short-term forecasts, random walks tend to outperform the accumulated wisdom of professional forecasters. That estimation uncertainty is not reduced for long-term forecasts either, because mean reversion cannot overcome the effects of compound interest. Luckily, there is a range of techniques, from simple to sophisticated, that can help long-term investors with this challenge.

Dumb Alpha: Are Your Forecasts Better Than a Random Walk?

Research confirms a “wisdom of the crowds” effect insofar as only a few analysts seem able to consistently outperform the consensus forecast compiled from many different analysts.

Alpha Wounds: Passive Management Is Not Passive

Passive investing is not actually passive. When looked at this way, it means there are important lessons for active investors. Examples include the hidden story behind market capitalization and the importance of low turnover. This also opens passive investing up to criticism regarding the free passes given to it in terms of risk, cost, and momentum.

Dumb Alpha: The Ignoramus’s Guide to Asset Allocation

Modern finance constantly busies itself with the development of new, more sophisticated ways to manage risk and generate returns. These efforts, however, generate their own risks. On the opposite end of the spectrum are simple ways to invest that have a proven track record of providing superior investment outcomes.

Holes in Some of Finance’s Critical Assumptions: A Dialogue with Massif Partners’ Kevin Harney (Part Two)

In part two of this discussion, Kevin Harney discusses the effects of the critical assumptions in finance and what can be done differently.

Holes in Some of Finance’s Critical Assumptions: A Dialogue with Massif Partners’ Kevin Harney (Part One)

Finance rests upon several critical assumptions that have logical holes. Among the assumptions are: Brownian motion and normally distributed outcomes. Here is a discussion of some of the effects caused by these assumptions.



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