Top 20 Papers and Books in Modern Finance

I am doing a post that links to what I consider to be some of the top papers and books in modern finance over the past 100 years. Before I do, please leave a comment with your favorites or recommendations. Think Fama, M&M, Markowitz, Graham, etc…

Nice Ibbotson Interview

Excerpt from AllAboutAlpha:

Q4: Your “ABCs of Hedge Funds: Alphas, Betas, and Costs” has been a popular research paper on Have you updated it?  Have you changed your views?

Peng Chen, Kevin Zhu, and I are in the midst of updating the results.  The preliminary results show that hedge fund alphas are still positive, although not as high or significant as before.  The results also show that the majority of the returns can be classified as beta, then fees, then net alpha, in that order.  Despite the fact that alpha makes up the minority of the return, it is still noteworthy that the net alphas are positive.  This is in contrast to the mutual fund industry where there is little evidence of aggregate positive alpha, even on a gross level.  On a net level, aggregate mutual fund alpha is usually negative.

(Short) LinkFest

Hmmmm, the entry of a FOF into the mutual fund space?  Hatteras Funds to Acquire AIP Mutual FundsPotentially very interesting…


More on the AQR Momo funds (and here).


A nice article on the endowments and my alma mater in particular.


AlphaClone just set up a two-week FREE trial.  If you haven’t checked it out, go play around and let me know what you think!

If you don’t believe in the value of the software, check out the World Beta Top 10 Popularity Group that is beating the market by 30% this year.

Hedge Fund Masters – Funds

  • Baupost
  • Berkshire
  • Blue Ridge
  • Eminence
  • Greenlight
  • Lone Pine
  • Maverick
  • Appaloosa (formerly Okumus, switched beginning of 2009)
  • Private
  • Tiger


In the mail, Finding Alpha by Eric Falkenstein.


First in a two part interview over on TradingMarkets

Case Closed Follow Up

I was reading Haugen’s factor paper again the other day and wondered how the real world results have been. The paper states that the co-author Nardin Baker has been running funds based on the factor model for 15 years at his firm Quantitative Equity Management. Anyone have their results or website? I can’t seem to find it. . .

Why Don’t You Just Say What You Really Think?


Ok, it is about time I got around to adding the FAQs to the website.  If you have a burning question, or anything you want answered regarding the timing paper, the book, AlphaClone, or anything else place it in the comments and I’ll include it in the FAQs.

Have a great 4th!

4th of July

[If you have already read the book, whether you loved it or hated it please leave a review on Amazon here.]

In celebration of the 4th of July (and my birthday), I’m going to give away a few books.

Head over to Twitter (you can follow me here), and I’ll be giving away some books in the style of The Adderall Diaries.

Namely, you get a free book but you have to pass it on when you’re done.

PS Just finished the very, very good book by Arnott and Hsu, The Fundamental Index.  Far exceeded my expectations.  Next up is The Myth of the Rational Market - enjoying it so far, seems to be in the same vein as Capital Ideas (Evolving).

Anyone using CRSP?

Are there any academics or funds on the list that use the CRSP database?

Considering doing a study that requires the CRSP stock database and don’t really want to fork over $20k+.

Combining Rotation and Timing, In Europe

One of the benefits of writing a blog – readers from around the world take your research, verify/disprove it, improve it, and take it in new directions.  Thanks to PC for the following charts.  Monthly data (and from the looks of it excludes Tbill yield when sitting in cash).

Andrew Bary writes a Barron’s cover article on the endowments and no mention of They Ivy Portfolio?  Shame on you Andrew.

euro monthly

Combining Rotation and Timing Systems

This is probably the #1 question I receive on email, usually in two forms:

q #1 – “Meb, have you considered combining the two timing systems?  Use the rotation system across the 5 asset classes from your book, but sell an asset and move to cash when it declines below its X moving average?”


q #2 – “Meb, have you considered combining the two timing systems?  Use a rotation system but move to cash for the whole portfolio when it declines below its X moving average?”

The questions sound similar but are slightly different.  I don’t think #1 will make any difference in performance (since I wrote this post I tested it and confirmed that it makes no difference).  For the vast majority of the time the asset is already above the moving average until the end when it drops, and the moving average usually doesn’t pick that up.

Q#2 is much more interesting to me.  However, you can only test this WITHIN an asset class.  Below we take a look at US Stocks.  (I see no reason this wouldn’t work in other asset groups like commodities, bonds, currencies, and foreign stocks.)

I used the Fido Sector funds from 1988-5/2009.

I took the top fund, updated monthly, based on the average rolling 3/6/12 month performance.

I then took the top 3 funds, equal weighted and updated monthly, based on the average rolling 3/6/12 month performance.

I then took the same portfolios, but moved them to cash when the S&P500 declined below its long term moving average (10 month simple).

Results are below.  Note how the rotation system generates about 5-6% outperformance per year.  The volatility is high (likely due to the upside volatility), and drawdowns are similar to buy and hold.  Using the timing system to hedge the portfolios resulted in declines in volatility (around 20%) and most importantly, a reduction in drawdown from 53% to around 27%.  Sharpe #s are misleading due to the high returns. . .


One could simply buy the ETFs or mutual funds when above the SMA then hedge or sell and move to cash when below.  Depending on the fund/broker, there could be  $$ transactions costs involved (especially if the account was small).   One could also just move into a rotation fund when above, then sell when below.  (Note: I haven’t looked at ANY of these funds below so no recs either way.  Most of them FAIL for various reasons).  If I am missing any, add them in the comments and I’ll edit.

PS Anyone wanna take the over under on how long till Barclay’s Blackrock offers momentum ETFs?  I say by the end of 2009.

Broad rotation funds (benchmark, 60/40 or diversified benchmark)

FUNDX Tactical Upgrader, (TACTX).

DWA Balanced (DWAFX).

US Stock rotation funds (benchmark, S&P500)

FUNDX Upgrader Fund (FUNDX)

Rydex Sector Rotation Fund (RYSRX)

DWA Technical Leaders (PDP)

VL Industry Rotation (PYH)

VL Timeliness (PIV)

Claymore/Zack’s Sector Rotation (XRO)

Foreign Stock rotation funds (benchmark, MSCI EAFE)

Rydex International Rotation Fund (RYFHX)

Claymore/Zack’s Country Rotation (CRO)

In registration:

AQR International Momentum Fund

AQR Momentum Fund

AQR Small Cap Momentum Fund

IndexIQ Momentum Leaders All Cap Fund



Log and non-log charts of the equity curves below.



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