How to Define Return Estimates That Play Well in the Backtest

Today’s guest produces the Breakingthemarket blog, which exploded onto the scene in spring of last year, spewing shrapnel at traditional beliefs about investment objectives and portfolio construction. Borrowing key concepts from Ed Thorpe and the Ergodicity Economics community, Matt  - who would like to remain anonymous for now – builds portfolios that focus on maximizing geometric returns by combining uncorrelated investments with frequent rebalancing and appropriate exposure informed by the Kelly criteria.

We dig into how Matt’s background in mechanical engineering informed his approach to the problem, why he thinks most investors are upside-down in their investment approach, and why his strategy of Geometric Rebalancing may be a compelling strategy for all markets. We dig deep into portfolio concepts like how he estimates returns and other portfolio inputs, the relative importance of errors in means and covariances, and how to manage portfolio exposures over time. We also discuss the principles of ergodicity economics and some broader implications for policy and the wealth distribution.

I’d been looking forward to this for months and it did not disappoint.