| lzhang Wed Jul 04, 2007 1:47 pm |
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Was LTCM's performance really better than SP500?
It was said LTCM earned high returns with considerably low risk before it went broke. Is the claim true or not?
Based on its past performance data, let's do a case study of its performance, comparing to those of SP500 and BRK for the same period.
From 1994 to 1998, LTCM had returns, before the fees, 28%, 59%, 57%, 27%, and finally -99.99%
For the same period, BRK had returns, without fees, 13.9%, 43.1%, 31.8%, 34.1%, and finally 48.3%
For the same period, SP500 had returns, without fees, 1.3%, 37.6%, 23%, 33.4%, and finally 28.6%
If we include the performance of 1998, the return of LTCM will inevitably go to negative, as is shown clearly in the spreadsheet. Even if we exclude its last year return, can we conclude it is better than SP500, or BRK? Let's see the numbers.
From 1994 to 1997, mean return/sigma return:
BRK: 30.28%/10.11%=3.0
LTCM: 41.93%/13.2%=3.2
SP500: 22.98%/14.76%=1.6
From those numbers, we can say LTCM has similar performance as BRK compared to SP500 for 4 years performance sample. But the numbers will be lower than those of BRK's if we consider fees, etc, in absolute or relative terms. Can we claim that we have strong evidence that the return of LTCM is greater than SP500? Probably not.
To make such strong claim with significance level of 0.05, we need t=2.4 for df=3. The t value for BRK is 2.73 for the 4 years sample, which means we find strong evidence that BRK has higher return than SP500, but that value for LTCM is 2.14, which means we do not have strong evidence that LTCM has higher return than SP500.
The problem here is still that the sample size is too small to make decisive conclusion for LTCM, and unfortunately, LTCM failed the next year.
Unless you have large and consistent differences, you really need large sample to make any strong claim.
http://ezinearticles.com/?Lessons-From-Long-Term-Capital-Management&id=612325
http://www.berkshirehathaway.com/letters/2006ltr.pdf
http://spreadsheets.google.com/pub?key=pBWqCNQoWBZpsaqbkvdwoXg |
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