Comments on: New study says widely-used models can be particularly misleading in performance evaluation http://allaboutalpha.com/blog/2008/07/14/new-study-says-widely-used-models-%e2%80%9ccan-be-particularly-misleading-in-performance-evaluation%e2%80%9d/ Hedge funds, portable alpha, 130/30 and alpha-centric investing Fri, 19 Mar 2010 07:52:26 +0000 http://wordpress.org/?v=abc hourly 1 By: ryan brown http://allaboutalpha.com/blog/2008/07/14/new-study-says-widely-used-models-%e2%80%9ccan-be-particularly-misleading-in-performance-evaluation%e2%80%9d/comment-page-1/#comment-124643 ryan brown Tue, 15 Jul 2008 19:42:57 +0000 http://allaboutalpha.com/blog/2008/07/14/new-study-says-widely-used-models-%e2%80%9ccan-be-particularly-misleading-in-performance-evaluation%e2%80%9d/#comment-124643 Practioners would immediately classify the Russell 2000 as the ideal of small-cap returns, instead of SMB. Two problems retail investors encounter when replicating HML or SMB, that I've never seen addressed by academic: 1). They are equal weight indices (actually hybrids of EW and VW), and no retail index/etf is equal-weighted 2). DFA, the most likely source to replicate these indices does not short, so you couldn't get returns associated with "ML" and "MB" from the the Fama-French epicenter. One thing that's surprising is how little momentum ("UMD") has been emphasized as a security selection strategy in the ETF/Fund space. Practioners would immediately classify the Russell 2000 as the ideal of small-cap returns, instead of SMB. Two problems retail investors encounter when replicating HML or SMB, that I’ve never seen addressed by academic:

1). They are equal weight indices (actually hybrids of EW and VW), and no retail index/etf is equal-weighted
2). DFA, the most likely source to replicate these indices does not short, so you couldn’t get returns associated with “ML” and “MB” from the the Fama-French epicenter.

One thing that’s surprising is how little momentum (“UMD”) has been emphasized as a security selection strategy in the ETF/Fund space.

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