Academic vs Practitioner Investment Research
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Highlights the "errors" academics make when conducting applied investment research. Describes the changes that should be made to make the research more useful to investment managers.
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Academic vs Practitioner Investment Research
- 1. Academic versus Practitioner Research “Errors” academics often make when conducting research in empirical finance Ralph Goldsticker, CFA Presentation to Berkeley Haas MFE Students February 19, 2016
- 2. 2Goldsticker 2/19/2016 Academic 1. Get published 2. Contribute to the body of knowledge 3. Be useful to investors Practitioner 1. Improve investment results 2. Demonstrate thought leadership 3. Get published Different research objectives
- 3. 3Goldsticker 2/19/2016 No data snooping, survivorship or look-ahead bias Minimize data mining Robust statistics Both should be rigorous.
- 4. 4Goldsticker 2/19/2016 Simplistic portfolio construction Little or no risk control Universe may not be investable Long-short strategies Equal-weighted strategies Performance metrics Full period average results Risk-adjusted returns Common “errors” made by academics
- 5. Simplistic portfolio construction Portfolio simulations should reflect an approach that would be adopted by an investor Institutional portfolios incorporate risk controls Industry diversification Factor exposures Most don’t use Fama-French factors. Institutional portfolios have other limitations Investable universe Capacity, concentration, liquidity Turnover Goldsticker 2/19/2016 5
- 6. 6Goldsticker 2/19/2016 Too often academic research presents only the average results for the full period. But, performance in sub periods matters to investors. Clients may not be able to tolerate long or sharp drawdowns. All value added may have occurred in early periods. Look at time series of value added. Are results episodic or cyclical? Do results trend? Are results correlated with macro or other factors? Does strategy perform better in some sectors/styles than others? Focus on full period average results
- 7. Long-short strategies Often academic tests of stock picking are performed using long-short strategies. But, Most investors do not short. The costs of shorting may be understated. There are constraints on shorting. Liquidity and transactions costs not properly incorporated. Most of value added may come from short side. Goldsticker 2/19/2016 7
- 8. Equal-weighted strategies Research often performed using equal weighted portfolios. Note: OLS regressions represent equal weighted strategies. But, equal weighted strategies ignore: Liquidity and capacity Turnover and transactions costs Risk controls Goldsticker 2/19/2016 8
- 9. Risk-adjusted returns Often academic research uses Sharpe Ratios or other types of risk-adjusted returns to evaluate/compare strategies. But, using Sharpe Ratios implicitly assumes that the strategy can be levered to the desired level of risk and return. Not all strategies can be levered. Not all investors are willing to lever. Leverage is not free. E.g. which is the superior investment without leverage? 6% expected return at 10% volatility 4% expected return at 5% volatility Goldsticker 2/19/2016 9
- 10. Empirical research should be implementable. Goldsticker 2/19/2016 Investment organization Philosophy & style Investment capacity Client preferences Investment objectives Risk controls Investment horizon 10