How Many Monkeys Does it Take to Find a Successful Strategy?

Give a monkey enough darts and she will eventually hit the bulls-eye on a dartboard. We wouldn’t dare consider that monkey an expert dart thrower, but investment professionals have been using essentially that same logic to assert that their strategies – often called “smart betas” – will outperform the market. New research exposes the faulty mathematics upon which such claims are based.

Early this month, four academicians — David H. Bailey and Marcos Lopez de Prado of Lawrence Berkeley National Laboratory, Jonathan M. Borwein of the University of Newcastle in Australia and Qiji Jim Zhu of Western Michigan University — posted a paper on the Social Science Research Network saying deservedly harsh things about backfitting...