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July 09, 2008

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Daniel Tunkelang

I'd be less skeptical if you told us you were risking your life savings on its predictions. :)

Prolific Programmer

The large market makers use algorithms based on mathematics. If these algorithms can be reverse-engineered, predicting an index (and thereby outperforming it) is a simple task.

Daniel Tunkelang

Not sure whether you're being serious or sarcastic. But, as Niels Bohr said, prediction is hard--especially the future. But if you believe that a widely available strategy outperforms the market, then I've got a bridge I can sell you for a good price. :)

Sandro Saitta

Very interesting post. Botraiders is a french company doing roughly the same thing (predicting individual stocks for the CAC40). Here is their web address: http://www.botraiders.com/

Geoff

The graph of TRAITS shooting into the stratosphere certainly looks impressive. What is unclear is a breakdown of the total costs that would be incurred from the constant buying and selling. The costs incurred through pursuing such a strategy would present an insurmountable hurdle to beating the market average would it not?

These people are mistaken if they think they or their software can predict the future direction of the markets. This is not cynicism but a refusal to believe in magic. Any investment professional who speculates on the market’s future should be relegated to a fortune telling parlor.

Geoff

What is equally puzzling is that since the beginning of 2008, the world markets in general all took a dive: the FTSE 100, S&P 500, CAC-30 and so on.

My question is how could the TRAITS portfolio give such returns when all the markets in all sectors were collapsing, and that the TRAITS portfolio selection IS the market, albeit selected portions of it.

How can the market beat itself by such huge amounts especially in these inflationary times?

I find this VERY fishy.

Timtaylor

I just came across this old post while doing a Google search, and felt I had to respond to the last two comments by Geoff. I am one of the authors of this work. The first point to make, is that the performance included realistic trading costs, price slippage, volume constraints and other real-world factors. We were working closely with some real hedge funds, and using high quality data from Reuters. The second point, about how TRAITS did so well when the markets were collapsing: this was a long/short equity fund (as mentioned in the original post). I suggest Geoff does some research on short trading to understand how this works.

The commercial interest in this project took a knock during the financial crisis (to say the least). However, we have more recently applied this to currency trading, with some even more impressive results. A phoenix may yet rise from the ashes...

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