The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies

Chapter 11

Anomaly-Based Processes for the Individual Investor

Leonard Zacks

As discussed in the Preface of this book, professional investors use the results of anomaly research to create multifactor models to manage market neutral and long portfolios. Market neutral portfolios are designed to generate a consistently positive return whereas long portfolios are designed to outperform an index. Although both the market neutral1 portfolios and the long portfolios2 are available to individual investors as mutual funds, a growing number of individual investors have begun managing their own portfolios using these quant techniques. The objective of this chapter is to provide some guidance to investors who want to implement an anomaly-based multifactor market neutral or long quant process.

Many of these self-directed quant investors are individuals with a quant bent who have been deeply disappointed with the returns generated by a broker or financial advisor and have decided that they can do it better themselves without paying the 1–2% fee charged by most advisors. Others are day traders and technical traders who have begun to realize that they are running their own anomaly-based process but are using only the momentum anomaly and would like to improve performance by adding some of the other anomalies to their processes. A third group are investors nearing retirement, many of whom have worked in the investment industry, who find that managing their own customized quant portfolios is a ...