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Rekenthaler Report

Does Academic Research Kill Returns?

Two professors study whether publishing investment-strategy research dilutes the alpha of those strategies.

Spreading the Word
Academic research should hurt active fund managers. Professional managers use their training and resources to discover what others cannot. If an academic paper lifts the veil to expose their findings, the untrained can easily bum a free ride, thereby squeezing--or perhaps even eliminating--those trades' profits.

Two professors, David McLean and Jeffrey Pontiff, have put that notion to the test. In "Does Academic Research Destroy Stock Return Predictability?" they study the performance of 82 investment strategies (which they unromantically call "cross-sectional relations," or "characteristics") that were found to bring positive risk-adjusted returns in previous academic articles.

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