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In meetings with clients, hedge fund representatives present flashy charts and speak equal parts oracle and mad scientist. And for technical analysts who market themselves as the most technical of analysts, the mathematical jargon—"stochastic oscillators," "Fibonacci ratios," "Elliot wave," "Golden ratio"—evinces a certain disarming beauty. "This mathematics is embedded in the structure of the universe," Cynthia Kase, who runs a firm that employs "wave analysis" to predict oil prices, told Bloomberg News in 2012. "It is the language of God."
Though much of this language is too gaudy to be embraced by sophisticated investors, there is a more subtle mathematical con that many, including editors at most of the top financial journals, overlook. The positive results that emerge from testing the performance of an investing algorithm on past market data, a process known as backtesting, can seem reliable and logical. And they sometimes are. But often, in practice, presentations of these results, though marketed as scientifically rigorous, conceal statistically insignificant methodologies.
(Score: 4, Insightful) by TheRaven on Tuesday November 24 2015, @11:52AM
They've mostly done worse than the S&P 500 (with dividends reinvested) over the last five years
But that doesn't matter. The entire point of the scam is that you don't need to do better than the market on average. You create 10 funds with mostly random investments. They're likely to have a distribution somewhere over the bell curve. Some will lose all of their money, some will do a lot better. You only show the successful ones to potential investors, along with the caveat that, of course, past performance doesn't guarantee future returns (and the strong implication that it does really). Then you charge them a modest commission on the huge amounts that they're investing. If they're lucky, then your continued random investment will keep doing well. Otherwise, eventually they'll either lose their money or pull it out and put it elsewhere. By which time, you have 20 more funds building a track record, and a couple of those will look sufficiently promising that you can sell them to the next round of suckers...
sudo mod me up