Monkeys Vs. Fund Managers – An Evaluation Of Alternative Equity Indices

LONDON - April 16, 2013 - PRLog -- Cass Business School, in partnership with Aon Hewitt, has conducted research over the last year to evaluate the many different approaches to determining constituent weights of equity indices. The research (http://www.cassknowledge.com/research/article/evaluation-alternative-equity-indices-cass-knowledge) looked at a range of different approaches including Heuristic and Optimised weighting schemes along with the more popular approach, referred to as Fundamental Indexation.

Heuristic weighting is based on a rule of thumb approach whereas Optimised weighting, as the name suggests, works using more complex optimisation procedures in order to construct market indexes. The most popular approach, Fundamental Indexation, takes into account a range of factors when constructing market indexes. When studying Fundamental Indexation, a number of equity characteristics were considered in order to gain a better comparison between techniques. All of these techniques were studied over the time frame of 1968 to 2011, bringing together a vast amount of data to help understand equity indices.

A notable aspect of the research was the creation of a computer program that made random stock picking decisions based on no market knowledge or weighted index. Such random choices could easily be ascribed to those of a monkey.  In the course of the study, it was discovered that random choice of constituent weights often produced superior performance when compared to a market capitalisation approach. This has led to a description of the study in the press as ‘Monkeys trump Fund Managers’.

The research was developed by the Cass Consulting (http://www.cassknowledge.com/cass-consulting/our-approach) service, the consulting solution from Cass Business School that brings together their practical knowledge of international business and their superior business research that covers a range of industries. Situated in London’s business heart, they are well placed to work alongside large financial institutions and international companies to conduct exemplary research in the field of business that will be of practical use.