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Technical Analysis

Fundbusters

The fundbusters team includes your familiar quant blogger, your local college professor and everyone else who can identify an edge and publish the results in a journal or in the blogosphere. As fundbusters get satisfaction from publishing edges rather than from using them, the rate of failure of funds of all types will increase and managers will be driven towards higher complexity edges.

The story of many managed futures funds and also of many hedge funds is rather simple but only in principle: someone at some point in time discovered a trading edge and used it successfully to generate a track record of managing real money for several years. Then a fund was launched and the track record was used to attract clients. This has worked well up to recently for even simple edges based on trend-following, channel breakouts and counter-trend strategies. However, things are getting hard now because of fundbusters. I am not going to mention specific papers but you can find hundreds of them written by physics or engineering professors. You can even find more edges published in the blogosphere. I am not going to try to analyze the peculiar fact that a lot of people find satisfaction in publishing edges instead of using them to make money. A person I know insists that this is typical behavior of losers or insecure individuals in general. I do not know if I agree with that. I think there may be many different reasons why people elect to publish trading edges. One of the simplest reasons is that the academic community has run out of new ideas in the traditional fields and has just discovered a new field to generate papers from. Some people need the papers bad to get tenure.

The fact is that in the last few years and after the trend in publishing trading edges has started, a lot of funds, especially managed futures funds, are having problems generating absolute returns. Recall that published fund indexes always include the survivors, i.e., they suffer from survivorship bias, and it is very difficult to ascertain what information they convey exactly.

Towards higher complexity

In the next couple of years, all simple edges will vanish because of fundbusters actions. Necessarily, fund managers will have to move towards higher complexity or face ruin. The move will be problematic as many funds are essentially just sales departments with a small room for a trader or two and all trading is handled secretly by those who know the details of the edge. Hiring quants will increase the possibilities of edges vanishing also because of becoming public, especially after quants depart from one fund to join another or elect to take the edge they discovered and start their own fund. Thus, many may elect to shut down the funds instead or move to higher complexity edges if they can manage that themselves. The life of fund managers is becoming very hard because of fundbusters.

Update on 04/10/2016: These papers corroborate my early assessment of the situation

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2156623

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2029057