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Portfolio Strategy

I Am No Expert

Investing is a complex, non-discrete system with an unknowable mix of skill and luck. While it is almost impossible to be an expert, our level of understanding has increased tremendously since launching our quantitative hedge fund, CenterBook Partners.

When people introduce me to others, they’ll sometimes describe me as an expert in position sizing, probability, manager skill, or something else like that. While flattering, it is incredibly uncomfortable because, for everything I know about those topics, there are hundreds of important questions I cannot answer. I can give informed opinions based on my experience and our data analysis, but the complexity of investing makes true understanding elusive.

If you ask an automotive expert a question about how a car works, they can probably answer 90% of your questions with a correct, provable answer. If you ask a golf expert to explain why Tiger Wood’s golf swing is better than mine, they can give you dozens of mechanically provable differences. A geneticist can explain why I have blue eyes while my parents have brown eyes with a high degree of confidence about the physical and biological processes that lead to that outcome. None of these experts know everything, but they do have a command of the basics which gives them the ability to answer 50%+ of the important questions with high confidence in the veracity of their answers.

I cannot. We have 15+ years of data, across 300+ funds, with 1000s of analysts, and I don’t have a high-confidence answer for what makes a great analyst or a great manager. I can give you my informed opinions and tell you some of the things we’ve found that correlate with greatness, but they only tell a portion of the story. We have almost a million probabilistic forecasts in Alpha Theory and we’re not sure of the best way to come up with probabilities for a scenario analysis. We have some pretty strong evidence for common errors, but we’re far from the best recipe for probabilities.


Alpha Theory is a position-sizing tool, and we don’t know the best way to size positions! I’m fairly confident that we know some bad ways to size positions, and we have evidence that Alpha Theory is better than doing it in your head. But we have a lot of work to do to figure out the ideal inputs and settings.

One of the best parts of launching our quantitative hedge fund, CenterBook Partners, is that we’re answering these questions, with data, in collaboration with our clients. We have a team with deep experience in execution, data science, optimization, portfolio construction, and risk that is investigating these questions and then building an investment strategy based on evidence. We are gaining “expertise” by applying rigorous statistical analysis to data.  

Investing is a complex, non-discrete system with an unknowable mix of skill and luck. This makes true expertise almost impossible. But our level of understanding has increased tremendously since launching CenterBook three years ago. Our confidence in our knowledge is also increasing because we are putting real dollars at risk. The complexities of investing may never allow me to be a true expert, but it is answering some very important questions that will make those that are part of the Alpha Theory ecosystem some of the most informed investors in the world.

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