The Pitfalls of Asset Management Research
13 Pages Posted: 5 May 2022 Last revised: 15 Jun 2022
Date Written: April 7, 2022
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
Suggested Citation: Suggested Citation