How Computers Trawl a Sea of Data for Stock Picks

(Wall Street Journal) -- Professors from University of California, Davis, and several other institutions warned in an April 2014 research paper of a trend of “overfitting” in math-based trading by hedge funds and other money managers, in which random correlations are interpreted wrongly as strong relationships. They concluded that “pseudo-mathematics” and “financial charlatanism” were running rampant on Wall Street. Such bad math, they wrote, “is a large part of the reason why so many algorithmic and systematic hedge funds do not live up to the elevated expectations generated by their managers.”