Portfolio Oversight: An Evolutionary Approach

50 Pages Posted: 8 Nov 2012 Last revised: 26 May 2014

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; AQR Capital Management, LLC

Date Written: November 7, 2012

Abstract

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, with several co-existing investment style which mutate over time.

A fund’s track record provides a sort of genetic marker, which we can use to identify mutations. The biometric procedure presented here can 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?”

Keywords: Skewness, Kurtosis, Mixture of Gaussians, Moment Matching, Maximum Likelihood, EM algorithm

JEL Classification: C01, C02, C15, C16, C38, C44

Suggested Citation

López de Prado, Marcos, Portfolio Oversight: An Evolutionary Approach (November 7, 2012). Available at SSRN: https://ssrn.com/abstract=2172468 or http://dx.doi.org/10.2139/ssrn.2172468

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

AQR Capital Management, LLC

One Greenwich Plaza
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqr.com

Register to save articles to
your library

Register

Paper statistics

Downloads
1,081
rank
18,657
Abstract Views
2,750
PlumX Metrics