Mean Reversion and Momentum Both Unreliable in Asia
|Nov 29th, 2011 | Filed under: Alpha Strategies, Commodities, Hedge Fund Industry Trends, Hedge Fund Strategies, Institutional Investing, Today's Post | By: cfaille||
As casino managers know, every gambler believes that he has a brilliant winning “system.” Two of the most common systems are obvious contraries: momentum on the one hand and and mean reversion on the other. A “momentum” player, seeing a certain coin come up “heads” three times in a row, will tell himself that the “head” side of the coin has the momentum, and will place his money there. A “mean reversion” player, on the other hand, thinks that a coin that has come down “heads” more than half the time in recent throws is due for a cluster of tails, and he puts his money there. The problem with either approach, though, is that the coin doesn’t know or care how it landed in its earlier throws. You can expect to be right just half the time using either system.
Researchers at GFIA, the Singapore-based wealth manager and adviser tested both strategies using a portfolio of hypothetical investments in the Asian hedge fund world. In an August report, they found that amongst equity long-short funds, which constitute about half of that universe, the returns of hedge funds “were sometimes mean reverting but at other times displayed persistence in positive/negative momentum.” That is to say that sometimes a coin that has come up heads three times will come up tails the fourth time, but at other times it will persist in coming up heads the fourth time. More…
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Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."