David,
I agree with your general point, but I’m also laughing because one of my top live money systems this year is a Piotroski variant. My second one is a microcap system. They’ve done much better than the ‘safer systems’ I launched as R2G’s. And much better then their indexes. My worst performing system is an SP500 focused system - and that had the best underlying index performance and chance of doing well this year.
@Rallan,
Thanks for the long reply. Good luck. Over the years, I’ve come to the conclusion that I have close to ZERO idea how any pro manager I choose, or model I invest in will do in the next 12 months. I can choose managers (and systems) I will exclude. Those rules are easier. And I’ve vetted at least 500 pro managers in the alternative space and invested in a handful (but tracked dozens - over more than a decade). What I do (sometimes) know is the general conditions in which a system will struggle and a likely range of outcomes I am willing to accept. All I can do is try to build a basket of systems for myself where I understand how they fit together… and then monitor systems / managers to see that they stay within a ‘range’ of expected performance.
If someone wanted to chase hi-performance in microcaps through a basket of such R2G’s (I stopped offering these because there are a lot, and if I really believe in a system I don’t want to compete with sub’s, but this is the dominant R2G money maker), that would be an okay approach. But, I would expect that most of them would return around the bench not counting fees. Some number (maybe 20%) would lose a decent amount of money and some number (hopefully 10-20%) would have big up years. So, in total you could make money over the bench. But, I would not expect them to have much stability year-to-year in terms of total rankings (unless liquidity is really low, i.e. under $300k ADT100, then it might). The issue is the fees relative to the amount you can invest in them. There is money to be made here, though. But I don’t think it will come by timing allocations. I think it will come by recognizing that the systems will, nearly all, underperform backtest results over a rolling 3 year period… but looking for systems that fit together (whatever that means to you)… or get you to a realistic number of holdings (say 30).
My bet is also that there are some very good R2G designers - better than most mutual fund managers, and better, in some cases, then ‘big name’ hedge funds. At least after fees. These are people who will give an ‘average’ P123 sub a better chance of beating the market then if they do things on their own. But, only if the fees make sense relative to dollars invested. And only if people can find them. And build a well constructed portfolio ‘blend’ of them. That’s very hard also for many weekend investors.
I can’t disagree with you waiting to see on any of my systems. But, if they do a 20% benchmark outperformance (or underperformance) year, it is my belief that they are no more likely to do well (or poorly) the following year. At least that’s my experience.
For ‘fun’, I made a little deck to reflect on this:
https://docs.google.com/presentation/d/1ijxx3csXW-6USn5NOGqHG08NgBim448St_8_fHhwWpA/pub?start=false&loop=false&delayms=3000
I still think the hardest issues for anyone, whether we built the system or not, is predicting it’s forward 1-2 year performance. I wish I could pick the ‘forward year’ winners from among my own models. I can’t.
Best,
Tom