Be Skeptical of Asset Management Research
6 Pages Posted: 3 Sep 2021
Date Written: August 16, 2021
Incentives distort research findings. We now know that research findings favorable to the sponsor of the research should be discounted on the grounds of conflict of interest (e.g., tobacco companies or pharma companies). Is the same true in the field of finance? I argue that economic incentives distort outcomes in both academic and practitioner finance research. The problem is somewhat less severe in the practice of finance. An asset manager who overfits their backtest will likely underperform in live trading. As such, they will lose investors and suffer a damaged reputation. Asset management has no equivalent to academic tenure.
Keywords: Backtesting, overfitting, p-hacking, research misconduct, research culture, performance fees, trading strategies, alpha
JEL Classification: G11, G12, G14, G17, G40, C58
Suggested Citation: Suggested Citation