Victor Niedheroffer’s Review of My Paper: “A Worthless Article”

Below I continue my series of posts highlighting some of the more interesting blogs in my last three years of writing.  The below is a nice prelude to the new paper I’m writing, so stay tuned!

Here is the post that announces the publication of my “A Quantitative Approach To Tactical Asset Allocation” paper way back in Feb 2007.

As a somewhat amusing aside, below is a review Victor Niederhoffer gave my paper back in September 2006.  Note that before I get a ton of hatemail, realize I am a huge fan of his published writings.  He is the author of The Education of a Speculator and Practical Speculation.     (verbatim, no edits, my bolding):

VN:  “(your paper) is based on 100 year old data, doesnt take account of the higher returns of
stocks, and doesnt use real prices and suffers from the law of small numbers in
chooinsg periods and marketst that beat stocks alone with or without leverage. a
very ad hoc and worthless article that will lead many to stay out of stocks
when they shouldnt
. v”

MF: (my reply which was not responded to)

“A couple notes:

The portfolio is invested in each asset class roughly 70% of the time.  So, it is in effect “in” stocks the vast majority of the time.

Also, the portfolio is allocated 40% to stocks (foreign and domestic). [Note: technically that is a 60% equity allocation with REITs] That is pretty much in line with the Harvard and Yale endowments.  But this figure was arbitrary to showcase the effects of diversification as well the timing system working in many varied markets.

The main point of the article (which I may have not done a good job of conveying) is that a simple timing system (in this case a moving average) does NOT improve returns but simply reduces risk.  However, with leverage, returns can be improved.

Siegel’s results in his book confirm these results (as do many others)

Thanks again for your time!!



I don’t take any joy in people blowing up their funds like Vic did (twice) (also here- The Blow Up Artist) -, but I am proud of how the timing model has performed since publication (and it is the #1 most read academic paper in the world over the past year).  Real time performance since publication is outperformance of over 20% with massive reductions in volatility and drawdown.

Looking at the ETF version, the model is mostly invested for the first time in a long,  long time.


Some good related quotes from the chapter “A Tail of Two Worlds: Fat Tails and Investing”  in the book More Than You Know by Mauboussin (I love the last quote!!):

“[Victor Niederhoffer] looked at markets as a casino where people act as gamblers and where
their behavior can be understood by studying gamblers. He regularly made small amounts of
money trading on that theory. There was a flaw in his approach, however. If there is a…tide…he
can be seriously hurt because he doesn’t have a proper fail-safe mechanism.”
George Soros
Soros on Soros (1995)

“In statistical terms, I figure I have traded about 2 million contracts…with an average profit of
$70 per contract. This average profit is approximately 700 standard deviations away from
randomness, a departure that that would occur by chance alone about as frequently as the
spare parts in an automotive salvage lot might spontaneously assemble themselves into a
McDonald’s restaurant.”
Victor Niederhoffer
The Education of a Speculator (1997)

“On Wednesday Niederhoffer told investors in three hedge funds he runs that their stakes had
been ‘wiped out’ Monday by losses that culminated from three days of falling stock prices and
big hits earlier this year in Thailand.”
David Henry
USA Today (October 30, 1997)

“Much of the real world is controlled as much by the ‘tails’ of distributions as by means or
averages: by the exceptional, not the mean; by the catastrophe, not the steady drip; by the very
rich, not the ‘middle class.’ We need to free ourselves from ‘average’ thinking.”
Philip Anderson
Nobel Prize Recipient, Physics
Some Thoughts About Distribution in Economics