medium · Market Microstructure
In the context of performance evaluation, why might a manager need 20 to 30 years of data to statistically prove their 'skill' at the 95% confidence level?
- Regulatory requirements mandate a 30-year track record before a manager can be designated as 'skilled'.
- Market cycles typically last 30 years, and a manager must prove they can perform across a full cycle.
- The annual standard deviation of excess returns (tracking error) is very high relative to the typical magnitude of annual alpha.
- The multiple comparisons problem forces the significance threshold to become stricter over time.
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