The Pitfalls of Asset Management Research

Abstract

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). Incentives distort research findings. 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.

Forthcoming, Journal of Systematic Investment

Keywords: Backtesting, overfitting, p-hacking, research misconduct, research culture, performance fees, trading strategies, alpha

JEL Classification: G11, G12, G14, G17, G40, C58