Re: Looking for papers on Evidence Based Results for T/A and F/A methods/ideas/hypoth
It's not necessarily "good" as a trading system, but due to the possibility of everyone holding, that makes it a good benchmark.
For example, there is not much point benchmarking a $100bn manager with someone who invests in mining juniors on the ASX, and by the same token it's not fair to benchmark small investors against their ability to hedge credit risk with CDS...so the capweight is a good benchmark for everyone big and small.
(keep in mind that I am referring to a portfolio that consists of both equity and credit here, not just capweight stocks).
Now, the funny thing about benchmarks is that most people (including hedge fund managers etc) mistake the benchmark as being a "baseline" whereas, over large enough sample of traders and trades, you will find the benchmark is actually a lot closer to the "ceiling" than you may have originally considered, especially when using leverage (yay exogenous shocks). This holds even more true for small investors without access to volume brokerage, tax advantages, etc.
This leads to the misconception that some "tweaks" will add value and allow one to outperform the benchmark (although it has been demonstrated that some tweaks actually do) and through these tweaks actually lose alpha.
Coupled with behavioural issues, the chance of them "adding value" to an extent that would generate statistically significant alpha for sustained periods across market regimes is quite low (if they even survive that long).
You may be mistaking recognition of these facts and subsequent recommendation that would-be investors take advantage of index funds to mitigate most of these issues, and thereby outperform the "average investor" (although some might be forgiven for thinkings so, this doesn't actually equal making profits), as a recommendation that these strategies are "good".
Slight difference I think.
It's not necessarily "good" as a trading system, but due to the possibility of everyone holding, that makes it a good benchmark.
For example, there is not much point benchmarking a $100bn manager with someone who invests in mining juniors on the ASX, and by the same token it's not fair to benchmark small investors against their ability to hedge credit risk with CDS...so the capweight is a good benchmark for everyone big and small.
(keep in mind that I am referring to a portfolio that consists of both equity and credit here, not just capweight stocks).
Now, the funny thing about benchmarks is that most people (including hedge fund managers etc) mistake the benchmark as being a "baseline" whereas, over large enough sample of traders and trades, you will find the benchmark is actually a lot closer to the "ceiling" than you may have originally considered, especially when using leverage (yay exogenous shocks). This holds even more true for small investors without access to volume brokerage, tax advantages, etc.
This leads to the misconception that some "tweaks" will add value and allow one to outperform the benchmark (although it has been demonstrated that some tweaks actually do) and through these tweaks actually lose alpha.
Coupled with behavioural issues, the chance of them "adding value" to an extent that would generate statistically significant alpha for sustained periods across market regimes is quite low (if they even survive that long).
You may be mistaking recognition of these facts and subsequent recommendation that would-be investors take advantage of index funds to mitigate most of these issues, and thereby outperform the "average investor" (although some might be forgiven for thinkings so, this doesn't actually equal making profits), as a recommendation that these strategies are "good".
Slight difference I think.