M6 Investment Challenge: The Role of Luck and Strategic Considerations

ArXiv ID: 2412.04490 “View on arXiv”

Authors: Unknown

Abstract

This article investigates the influence of luck and strategic considerations on performance of teams participating in the M6 investment challenge. We find that there is insufficient evidence to suggest that the extreme Sharpe ratios observed are beyond what one would expect by chance, given the number of teams, and thus not necessarily indicative of the possibility of consistently attaining abnormal returns. Furthermore, we introduce a stylized model of the competition to derive and analyze a portfolio strategy optimized for attaining the top rank. The results demonstrate that the task of achieving the top rank is not necessarily identical to that of attaining the best investment returns in expectation. It is possible to improve one’s chances of winning, even without the ability to attain abnormal returns, by choosing portfolio weights adversarially based on the current competition ranking. Empirical analysis of submitted portfolio weights aligns with this finding.

Keywords: Game theory, Portfolio optimization, Ranking strategy, Sharpe ratio, Statistical significance, Equities

Complexity vs Empirical Score

• Math Complexity: 6.5/10
• Empirical Rigor: 7.0/10
• Quadrant: Holy Grail

  flowchart TD
    A["Research Goal:<br>Luck vs. Skill in M6 Investment Challenge"] --> B{"Methodology"};
    B --> C["Statistical Analysis<br>of Sharpe Ratios"];
    B --> D["Stylized Game-Theoretic Model<br>for Ranking Optimization"];
    C & D --> E{"Data / Inputs"};
    E --> F["Historical Team<br>Portfolio Returns"];
    E --> G["Competition Rules<br>& Ranking System"];
    F & G --> H{"Computational Processes"};
    H --> I["Test Significance of Extreme Returns<br>Monte Carlo Simulation"];
    H --> J["Optimize Portfolio Weights<br>for Rank Maximization vs. Return Maximization"];
    I & J --> K["Key Findings & Outcomes"];
    K --> L["Extreme Sharpe Ratios likely due to Luck<br>(No sufficient evidence of skill)"];
    K --> M["Winning Strategy ≠ Best Returns<br>Adversarial weighting improves rank odds"];