Quant Mashup - GestaltU The Definitive Book on Factor Investing [GestaltU]Smart beta. Empirical finance. Evidence-based investing. These terms have migrated from the periphery of the investment ecosystem just ten years ago to become the investment world’s most popular memes today. Why? It stands to reason that investors are simply disenfranchised with traditional forms(...) Asset Allocation is Not for the Faint of Heart (Long Live Diversification) [GestaltU]I’m starting to feel like a rancourous curmudgeon, but I am frustrated by some of the misguided commentary on asset allocation and how diversification is a myth. We have posted a lot of research on fairly complex asset allocation topics, but I think many readers would be surprised to learn that I(...) Risk Parity and The Four Faces of Risk [GestaltU]Benjamin Graham famously said that "In the short run, the market is a voting machine but in the long run, it is a weighing machine." But this is not quite correct. Rather, in the short term, the market is a machine where investors "vote" about what the market will(...) TAA Alpha and The Greatest Trick the Devil Ever Pulled [GestaltU]The investment industry has investors convinced that the only path to better performance is through stock selection. As a result, most investors approach the challenge of portfolio construction exactly backward, and miss out on the most important opportunities to produce differentiated performance.(...) Risk Parity isn't the Problem, it's the Solution [GestaltU]Bank of America Merrill Lynch recently released a research note suggesting that Risk Parity investment strategies currently represent a substantial source of systematic risk in global markets. The note was picked up breathlessly by several media outlets and posted under sensationalist headlines(...) Bold, Confident & WRONG: Why You Should Ignore Expert Forecasts [GestaltU]If you read the paper, watch the news, and listen to investment experts you are doing it all wrong. There are no market wizards; the emperors have no clothes; most people are ‘swimming naked’. The following paragraphs offer abundant and incontrovertible evidence condemning expert judgment for(...) On Backtesting: An All-New Chapter from our Adaptive Asset Allocation Book [GestaltU]If you've been a regular reader of our blog, you already know that we recently published our first book Adaptive Asset Allocation: Dynamic Portfolios to Profit in Good Times - and Bad. As of this writing, it still stands as the #1 new release in Amazon's Business Finance category.(...) Quant Nerds Can Be Fun Too: We're Hosting a March Madness Challenge [GestaltU]This is cross-posted from SkewU, our sister blog. We don’t normally do this sort of thing, but this is important because: 1. You should check out SkewU, as it’s quite a bit different than GestaltU. Our posts over there are more diverse and whimsical if that’s something that interests you. 2.(...) Navigating Active Asset Allocation When Diversification Fails [GestaltU]Exactly one month ago clients of ReSolve Asset Management received our 2015 annual letter, entitled “Navigating Active Asset Allocation When Diversification Fails”. People who signed up for our email distribution list received it aa few days later. If you would like to receive premium content in(...) 'Tis the Season for Bold Prediction [GestaltU]It is with a giddy sense of schadenfreude that every year around this time, we get to read bold prediction rubbish like this: A best-selling personal finance guru, a behavioral economics columnist at MarketWatch, a Harvard-educated economist and other notable financial experts all warn the stock(...) Tactical Alpha Part III - Asset Allocation - Security Selection [GestaltU]By far the greatest source of personal consternation as a professional in markets is investors’ obsession with finding the best stocks, or the best stock pickers. The fact that investors pursue this objective at all undermines all meaningful arguments about efficient markets. After all, why on(...) Tactical Alpha in Theory and Practice (Part II): Principal Component Analysis [GestaltU]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),(...) Experts Aren't Helpful, and Other Useful Lessons From "DIY Financial Advisor" [GestaltU]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(...) Tactical Alpha: Theory & Practice (Pt. I) - Fundamental Law of Active Management [GestaltU]Introduction For the overwhelming majority of investors, portfolios are broadly organized into strategic silos of stocks and bonds, such as the ubiquitous 60/40 balanced portfolio. By design, the strategic proportions of stocks and bonds in the portfolio change very little over time. However, within(...) Apples and Oranges: A Random Portfolio Case Study [GestaltU]This article was motivated by a provocative discussion with a thoughtful RIA. Let’s call him Harry. Harry expressed some disappointment with the performance of Global Tactical Asset Allocation (GTAA) strategies over the past few years relative to some popular tactical U.S. sector rotation funds.(...) Forget "Active vs. Passive": It’s All About Factors [GestaltU]We just love a good debate, and there seems to be quite a heated debate at the moment about the relative utility of passive versus active investing. Perhaps this debate is as timeless as investment management itself, but a flurry of recent studies may have finally armed passive advocates with enough(...) Empirical Finance: Meeting Fiduciary Standards Through Skepticism, Not Cynicism [GestaltU]Michael Edesses is out with a scathing article lambasting the field of empirical finance. He draws inspiration from Harvey, Liu and Zhu's (HLZ) recent article, entitled "…and the Cross Section of Expected Returns", but extends HLZ's conclusions to an absurd limit. In this(...) All Strategies Blow Up [GestaltU]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(...) Global Tactical Asset Allocation: Just the Facts [GestaltU]Rob Seawright of Above the Market recently posted an article broadly skewering tactical asset allocation (TAA) strategies. He cites the failure of market gurus to pick market turns (from a CXO analysis we've discussed in the past), and a Morningstar study showing that TAA has under-performed(...) We’re Launching Our 2nd Blog: SKEW [GestaltU]Today, we are happy to announce the launch of Skew, our second blog. Until we move it to its permanent home, you can find it at GestaltU.com/skew/. Bookmark it or add it to your feed reader right now. Go ahead, we’ll wait. Every day, we consume a formidable amount of information. Some of the(...) Winning By Not Losing: Bootstrap Quantile Clouds [GestaltU]Fundamental Rule #1: For most investors, financial risk is singularly defined as the probability of not reaching financial goals. As such, the sole objective of investing is to minimize this risk. If you are an average investor with a typically basic understanding of investing, Rule #1 above will(...) The Narrative is Reality [GestaltU]“I have come to believe that the whole world is an enigma, a harmless enigma that is made terrible by our own mad attempt to interpret it as though it had an underlying truth.” ― Umberto Eco, Foucault’s Pendulum Back in the days when I still thought markets were driven by fundamentals I used(...) Your Alpha is My Beta [GestaltU]A couple of weeks ago, I had the pleasure of a short correspondence with Lars Kestner, a well known quant and derivatives trader, and creator of the thoughtful K-ratio as a measure of risk adjusted performance. We connected on the definition of alpha, and how the term has been so abused in media and(...) Dow 20,000: Is 2015 the Year? [GestaltU]It’s that time of year again. Yup, that jolly, happy time of year when the soothsayers of Wall Street start trumpeting their views on what’s going to happen in 2015, and how to position portfolios to profit. Esteemed Wharton professor, Jeremy Siegel, author of the permabull bible, Stocks for the(...) A Century of Generalized Momentum [GestaltU]We enjoy collaborating on new research projects simply because nobody has a monopoly on interesting ideas. Where our expertise in asset allocation, tactical strategies and portfolio optimization methods might prove useful, we are always open to discussing new and ongoing research. Measuring Tactical Alpha, Part 2 [GestaltU]When we left off in Part 1, we promised to examine how select Global Tactical Asset Allocation products stack up against the Global Market Portfolio from the perspective of several performance measures – particularly Sharpe ratio, alpha and information ratio. Without further adieu: