Markowitz meets Darwin: Portfolio Oversight and Evolutionary Divergence
Marcos Lopez de Prado
Hess Energy Trading Company; Lawrence Berkeley National Laboratory; RCC at Harvard University
University of California, Irvine
July 15, 2012
Johnson School Research Paper Series No. 39-2011
An analogue can be made between: (a) the slow pace at which species adapt to an environment, which often results in the emergence of a new distinct species out of a once homogeneous genetic pool, and (b) the slow changes that take place over time within a fund, mutating its investment style. A fund’s track record provides a sort of genetic marker, which we can use to identify mutations. This has motivated our use of a biometric procedure to detect the emergence of a new investment style within a fund’s track record. In doing so, we answer the question: “What is the probability that a particular PM’s performance is departing from the reference distribution used to allocate her capital?”
The EF3M approach, inspired by evolutionary biology, may help detect early stages of an evolutionary divergence in an investment style, and trigger a decision to review a fund’s capital allocation.
Number of Pages in PDF File: 33
Keywords: Skewness, Kurtosis, Mixture of Gaussians, Moment Matching, Maximum Likelihood, EM algorithm
JEL Classification: C01, C02, C15, C16, C38, C44working papers series
Date posted: September 22, 2011 ; Last revised: August 8, 2012
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.453 seconds