Where’s the Beef?

Abstract

In the 1980s, there was a famous TV ad for Wendy’s with the tagline “Where’s the Beef?” Many investors in today’s so-called smart beta strategies may well be asking a similar question, “Where’s the Alpha?” Investors frequently buy into historical simulations or backtests, often supported by compelling studies by respected academics, suggesting wonderful performance with remarkable consistency, only to earn no alpha once they invest. The only winners typically are the asset managers and brokers through their fees and commissions. The problem is data mining and performance chasing, the nemeses of all investors. Yes, academics, “quants,” and investment professionals are all subject to these same temptations, very nearly to the same extent as retail investors. This article explores the ways that seasoned professionals fall prey to these simple blunders, and the lessons that could perhaps allow us to deliver on client expectations, both by delivering more, and by encouraging more sensible expectations.

Keywords: performance chasing, data mining, investor expectations gap, smart beta, valuation, noise trading, implementation shortfall

JEL Classification: G10, G11, G17, G40, G41