first, the returns in their “theoretical back test” are OK, averaging around 10% per year since 2000. decent, but nothing to write grandma about. that nubmer does not include fees either.. more on that below..

i’m curious why don’t they produce hard numbers if they have been trading this strategy for their hedge funds. one should always assume lower returns than any backtest ever projects.

more confounding is the distribution of their backtest results. any strategy designed to capture “mean reversion” — as their equilibrium-speak alludes to — should do better in range-bound markets than in strongly trending ones. you’re basically fading moves rather than chasing them.. selling moves higher, buying moves lower.. but, if something Keeps trending, it by definition does not “revert” very well.

and they had a bad year in 2004? ‘04 was the ultimate year for choppy back & forth trading. so that doesn’t make sense. most well known trend-following fund managers had dismal years in 2004 because of that chop.

as far as their model, in my opinion, believing you know the true value / equilibrium price of an asset at any (in their case “every”) moment is a bit arrogant. i couldn’t disagree more with that theory, and personally always believe that other insiders/traders know more than me about value — that’s what technical analysis is all about.

in the slide show, they actually note one of the trades that their (quote from the document) “robust covariance matrix created by Bayesian statisical techniques” thought was a good idea. it was “Oil up equals Transportation stock prices down.” sounds great, right? the markets are just not that simple.. they are not rational like that!

the Dow Transports were one of the top 3 Leading sectors in 2004, right in the face of ramping oil prices. people were confused, just as they are now about long term interest rates. i’m assuming these folks were short the Trannies, and received a prolonged whooping on that position.

FINALLY.. the projections made are absurd to me:
using 2006, because it’s in nice round numbers..
in ‘06 they forecast assets of 100 mil, mgmt fees of 3 mil (3%!!.. and that doesn’t change in out-years).. and incentive fees of 2.4 mil. .. So, they are telling me they’ll turn 100 mil of investor money into roughly 110, keep 5.4 for themself and the limited partners earn a mighty 4.6 (and are happy about it)?

yeah, right.