Feb

11

Technical Analysis is not the only area where charlatanism seems to rampant. In my view, there is more than a little bit of charlatanism in the more reputable field of "asset allocation". Much of the problem stems from the fact that many of the well regarded practitioners don't seem to understand practical aspects of the market, such as capacity constraints, or that they are using hindsight to pick the winners within an "asset class" to represent the field. Also, their mostly flimsy simulation is exactly the kind of thing they would criticize if done by a technical trader. Calling what is effectively a speculative strategy an "allocation" seems to subject such things to a much lower level of criticism. I understand that all the people selling commodity-like products need a secret sauce for marketing purposes, but at times the useless tinkering gets ridiculous.

Gibbons Burke writes: 

Trust, faith and confidence are everything in this game, as in life. Men who can elicit confidence from others have a skill which may or may not correlate well with their ability to make money in the markets. The name "con man" is short for a "confidence man" because creating and maintaining confidence until the play is over is the essential skill of a huckster.

Rishi Singh writes: 

The biggest culprit I found in this "charlatanism" were those who did not have skin in the game but sold products that allowed people to put their skin in the game: banks. Asset allocation of "smart-beta" type strategies are being commoditized and packaged to be sold to clients, but if you look at the research it is ridiculous. They post strategies of sharpes between 3-6 and some of them are long/short commodities which significantly ignore capacity constraints. When you try to replicate their strategies, you cannot get close to those numbers. Our backtests found sharpes of about ~2, which we still discounted and when we ran our own strategies, we realized just a sharpe just under that (before fees). One disclaimer was our fund would never be the next Bwater given capacity constraints of these strategies.

The academics were not much better. I remember reading a paper that used cattle spot prices (not futures) in their backtest. I could probably only replicate the results of 15-20% of academic papers.

I am hesitant to blame anybody for this, as I think it is the current pervading culture of banks that promote quantity of research vs. quality. People need to feed their families and were taught these methods were okay. How you break the cycle, I'm not certain.

We did find the papers were fantastic for idea generation though and to reveal general trends in the marketplace. It did give us inspiration that helped improve upon our current strategies…unfortunately though it looked like they were planning to sell their strategies to clients as-is.

anonymous writes: 

Central Banking, and specifically the Federal Reserve, must be counted as one of the greatest confidence games ever pulled off.
 


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