Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Quant Strategies : Theory vs. Reality

FYI: When pitching an investment product with a backtested history the frequent response from potential investors is that they have never seen a bad backtest. Naturally this is true as there is no point in marketing a strategy with a poor backtest as investors have zero interest in losing money. They also tend to chase performance.

However, it is somewhat challenging to respond to the criticism for the quant that ran the backtest. Most quants have a scientific education and are unlikely to champion discretionary investing. Especially given that most active fund managers have failed to beat their benchmarks over the short, medium and long-term as highlighted by the S&P SPIVA Scorecards.

Backtesting should be regarded critically, although it also depends on the type of backtesting. The more complex and innovative a strategy is, the more skeptical a potential investor should be. Theoretical returns of statistical arbitrage in Indonesian stocks are less likely to be replicated in reality than those of a Value strategy in the US.

The returns of plain-vanilla quantitative strategies as seen in factor investing literature should be achievable. In this short research note, we will contrast publicly available factor investing data and investigate if investors were able to capture theoretical returns.
Sign In or Register to comment.