Monday morning. Friend forwards a smart beta brochure. Big number on the cover. Small number in the footnote. The gap is a paper that got published.
"Backtested 18 pct CAGR since 2008." Then the footnote. Strategy launched as a fund in 2018. Pulled the live track record. 9 pct CAGR over the seven years money could actually buy it. Half the headline gave up the ghost the day the paper hit Journal of Finance and the fund hit the shelf. The brochure prints the in sample. The fund pays the out of sample. The market quietly charges you for reading a famous paper.
18.0pct
Brochure backtest CAGR
In sample window. Sample period chosen by the researcher. The story the brochure tells on the front page.
9.1pct
Live fund CAGR seven years
Out of sample. Money could buy the factor. Roughly half the headline. The verdict from the market, not the researcher.
58pct
Median post publication decay
McLean Pontiff 2016 Journal of Finance. 97 published anomalies. About 42 pct of in sample alpha persisted out of sample.
A factor is an anomaly with a name. The anomaly worked because few people knew it. The naming gave it a paper. The paper gave it an ETF. The ETF gave it AUM. The AUM gave it arbitrage. Each step is a tax on the next investor reading the same backtest. Card two is the cohort ledger. Five named factors. Two windows each. The decay column is the one nobody prints on the brochure.