EVANSTON, Ill.--(BUSINESS WIRE)--Evanston Capital Management, LLC, an alternative investment management firm with approximately $5 billion in assets under management, today published its most recent whitepaper analyzing the return properties of smart beta strategies and how to adjust historical backtest results to inform prospective return assumptions.
The white paper outlines foundational characteristics of smart beta strategies and the impact of data mining and arbitrage on historical backtests when calculating accurate forward-looking return estimates for such strategies. The key identifying assumption for the particular smart betas and time periods analyzed is motivated by Nobel Laureate Eugene Fama’s famous 1991 Efficient Capital Markets survey paper (i.e. “Efficient Capital Markets: II”). Evanston Capital Management analyzed both backtested and actual performance data over a 25-year-period and found that all of the performance metrics decreased during the out-of-sample period. The out-of-sample performance reductions ranged from 30-to-71 percent, suggesting that data mining and arbitrage play a material, economically significant role in performance expectations.
“Smart beta is one of the most popular, cutting-edge investment products available today,” said Peter Hecht, Ph.D., Senior Investment Strategist, Evanston Capital Management. “As is the case with many investment products, the largest risk confronting smart beta investors is what to assume about returns on a prospective basis. Unlike other products, smart beta strategies have a few key features that make predicting returns on a prospective basis interesting, yet potentially problematic. While historical backtests are indeed helpful, we found that without fully appreciating the impact of data mining and arbitrage, the over-reliance on historical backtesting can create a false sense of confidence about future return performance.”
Adam Blitz, CEO and CIO of Evanston Capital Management, added: “Through our whitepapers and research, our goal is to educate both investors and financial advisors about major issues confronting the markets and provide actionable guidance on how to better navigate the evolving environment.”
The full whitepaper, Smart Beta, Alternative Beta, Exotic Beta, Risk Factor, Style Premia, and Risk Premia Investing: Data Mining, Arbitraged Away, or Here to Stay?, is available at https://www.evanstoncap.com/research.
About Evanston Capital Management
Evanston Capital Management, LLC (“ECM”) is an alternative investment management firm focused on providing multi-manager hedge fund programs for institutional and high net worth investors. Formed in 2002, ECM manages a variety of strategies emphasizing more concentrated portfolios, and ECM seeks to identify portfolio managers in which ECM has gained high conviction. ECM manages commingled funds and offers customized solutions to clients looking to tailor their hedge fund program. ECM has more than 300 institutional investor relationships and approximately $5 billion in assets under management. For more information, please visit www.evanstoncap.com.