April 19, 2016 - Big Ideas
Are the backtests provided for alternative beta investment products representative of their future live performance? In their March 2016 paper entitled “Quantifying Backtest Overfitting in Alternative Beta Strategies”, Antti Suhonen, Matthias Lennkh and Fabrice Perez compare the backtested and live performances of alternative beta products offered by investment banks. The strategies underlying these products are formulaic and non-discretionary, designed to extract risk factor/style premiums (such as value, momentum, carry or term) or exploit some financial market anomaly (such as turn-of-the-month or mean reversion). Specifically, they:
- Present an overview of alternative beta products offered by investment banks.
- Compare backtested and live performance data for these products.
- Compare backtested and live factor exposures four four strategy families (equity value, equity volatility, fixed income term and currency exchange carry).
Using daily returns in U.S. dollars of 215 alternative beta strategies across five asset classes and 11 strategy types offered by 15 investment banks as available during January 1990 through early March 2015, they find that: Keep Reading