How 2014 NAAIM Wagner Award winner Dave Walton uses the randomness inherent in data mining to accurately estimate trading system performance
Littleton, CO – April 29, 2014 – The National Association of Active Investment Managers (NAAIM) announced today that Dave Walton is the 2014 first-place winner of the $10,000 NAAIM Wagner Award for Advances in Active Investment Management for his paper “Know Your System! – Turning Data Mining from Bias to Benefit through System Parameter Permutation.”
In its sixth year, the NAAIM Wagner Award is designed to expand awareness of active investment management techniques and the results of active strategies.
Of Walton’s paper, Greg Morris, the Chairman of the Award Committee, writes “Dave Walton, first place winner of the NAAIM Wagner Award, has developed a sophisticated system to help investment advisors evaluate and use their trading systems more effectively. The encouragement of this kind of innovative thinking is why NAAIM created the Wagner Award competition – to bring out more original ideas and research in the Active Investment Management field.”
Morris is Chairman of the Investment Committee and Chief Technical Analyst at Stadion Money Management, LLC.
Dave Walton is a private trader and co-founder of StatisTrade, a trading system evaluation think tank, in partnership with 2011 Wagner Award winner Thomas Krawinkel. Walton has been involved in active investing since 1999, with a focus on system trading since completing VTI’s Super Trader program. As a computer engineer by training, Walton applies system validation principles and statistical methods to trading. Prior to StatisTrade, Walton spent 18 years ensuring the quality and reliability of cutting-edge technology products for one of the world’s largest computer chip manufacturers.
In his award-winning paper, Walton argues that not only does traditional trading system development lead to positively biased performance estimates, but that much valuable information is lost in the process. The result for many traders is frustration due to poor realized trading system performance that does not live up to expectations. Walton demonstrates how to leverage the optimization inherent in typical system development via a method named System Parameter Permutation (SPP) and to extract information that enables realistic contingency planning based on probabilities.
Many traders and system developers go to great lengths to avoid the effects of randomness in trading results, knowing the large impact it may cause. With SPP, Walton embraces randomness as a tool to help uncover what may probabilistically be expected from a trading system in the future. The method is simple to apply yet very effective. Walton hopes SPP will help traders increase their odds of success in the markets through a deeper understanding of potential risks and rewards prior to allocating capital to a system. “You don’t need a PhD. in statistics or the resources of a large hedge fund to give yourself an edge” said Walton.
In His Own Words:Understanding the Winning Paper
A panel of investment professionals selected by the Wagner Award committee reviewed entries and award the prizes. The criteria used in judging the papers are: practical significance to practitioners of active investing; quality of exposition; analytical rigor; and novelty of results. In addition to Morris, the panel included Jerry Wagner of Flexible Plan Investments, Ltd. ; John Ehlers of Mesa Software; John McClure of ProfitScore Capital Management; and Bill Barack of Lindisfarne Investments LLC. To find out more about the judges’ panel, follow this link: https://www.naaim.org/resources/wagner-award-papers/wagner-award-judging-team/
With 23 entries this year, the 2014 Wagner Awards is truly an international competition, attracting responses from authors in 6 of the United States plus Germany, New Zealand, Canada, and new this year, Malaysia and the Netherlands.
Receiving second place in the competition was Arthur Grabovsky, President of Tensor Consulting located in Toronto, Ontario (Canada) for his paper “Back to Black.” Michael Gayed, CFA, Chief Investment Officer and Charles V. Bilello, CMT, Director of Research of Pension Partners, LLC, received the third place prize for their paper “An Intermarket Approach to Tactical Risk Rotation Using the Signaling Power of Treasuries to Generate Alpha and Enhance Asset Allocation.” Second and third place winners will receive $3,000 and $1,000, respectively.
All of the NAAIM Wagner Award research papers are published on the NAAIM website at https://www.naaim.org/resources/wagner-award-papers/. Full copies of the papers are available to download after completion of a short form. NAAIM members can also view or download the papers in the NAAIM Community (look in Resources for 2014 Wagner Award Papers).
First Place winner Dave Walton will be presenting his winning paper at NAAIM’s 2014 national conference, Uncommon Knowledge, May 5-7 in Fort Lauderdale, Florida. For more information or to register for the annual conference, visit the NAAIM website https://www.naaim.org/events/uncommon-knowledge-national-conference/
About the Wagner Awards
In honor of the vision and work of Jerry Wagner, NAAIM founding member and president and CEO of Flexible Plan Investments, Ltd., the Wagner Award for Advances in Active Investment Management annually awards $10,000 to a first-place paper providing evidence of the validity of an active investing approach using a trading system that outperforms the market by some well-accepted metric such as risk-adjusted return, annual return or drawdowns. Second-place and third-place winners are awarded $3,000 and $1,000, respectively. Previous winning papers are available for members to view/download. Contact email@example.com for more information.
The top prize in 2013 went to Dave Klein, Partner and Co-Founder of Capital Context, LLC for a thought-provoking methodology outlined in his white paper entitled, “Equity Sector Rotation via Credit Relative Value.”
The National Association of Active Investment Managers (NAAIM) is a non-profit trade group of nearly 200 registered investment advisor firms that collectively manage over $31 billion in assets. NAAIM member firms provide active money management services to their clients to produce favorable risk-adjusted returns as an alternative to more passive, buy-and-hold investment strategies. NAAIM publishes the weekly NAAIM Exposure Index, and sponsors the annual Uncommon Knowledge conference along with smaller conferences on managing portfolios, trading techniques for various instruments and markets, regulation and compliance, and other topics of interest to its membership. For more information, visit www.naaim.org.