Why do you rally against the Modern Portfolio Theory that won the 1952 Nobel prize

Difficult question as one would think that the Nobel prize doesn’t get extended to idiots! True, the Modern Portfolio Theory was an important discovery and it is frequently used by simple robo-advisors and Financial advisors. As a shortcut, the theory says that you cannot outperform the market without taking more risk and that given a unit of risk there is a maximum return you can accomplish. We compare it with throwing oil on a wild sea: the waves will mellow but they are still there. The theory has a few assumptions that are not true in the real markets and those assumptions were needed to make the theory work mathematically. That often happens with theories. Just because this theory has won a Nobel prize and is actively used, doesn’t mean its as strong as a Natural Law: it is not.

The fact that Quant hedge funds exist and some are very successful creating return with lower risk, means that there is more going on. There are exceptions to this theory and algorithmic investing can be a good way to find the exceptions (also called Alpha)

At Unhedged we create algorithms that are good at finding exceptions. They all are switching risk-on and risk-off with a different economic hypothesis and therefor they all behave differently. They are not all wrong or all right at the same time, but by combining the algorithms we create a stable strategy.

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