When use of pseudo-maths adds up to fraud

Stephen Foley:

An academic journal called the Notices of the American Mathematical Society may seem an unlikely periodical to have exposed fraud on a massive scale. The investigation, published in the current edition, is certainly not going to sit among the nominees for next year’s Pulitzer prizes. But a quartet of mathematicians have just published a piercing article in the public interest and in the nick of time.

In their paper, entitled Pseudo-Mathematics and Financial Charlatanism, they make the case that the vast majority of claims being made for quantitative investment strategies are false.*

By calling it fraud, the academics command attention, and investors would be wise to beware. With interest rates about to turn, and a stock market bull run ageing fast, there have never been such temptations to eschew traditional bond and equity investing and to follow the siren sales patter of those who claim to see patterns in the historical data.

The (unnamed) targets of the mathematicians’ ire range from individual technical analysts who identify buy and sell signals in a stock chart, all the way up to managed futures funds holding billions of dollars of clients assets.

There will be many offenders, too, among investment managers pushing “smart beta” strategies, which aim to construct a portfolio based on signals from history.