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The Handbook of Equity Market Anomalies: Translating Market Inefficiencies into Effective Investment Strategies by Leonard Zacks

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Appendix

Use of Anomaly Research by Professional Investors

This appendix first outlines how the results of anomaly research are used in 3 areas of professional quant investing—statistical arbitrage, high frequency trading, and equity multifactor models. Because the primary use of the anomaly results is in multi-factor models we then estimate the size of the assets managed in hedge funds, institutional separate accounts, and mutual funds using multifactor models.

From Academia to Wall Street

For nearly 50 years hundreds of professors have published literally thousands of articles related to the efficient market and anomalies. This research has changed the nature of equity investing.

The anomaly research can be separated into two broad phases. The first from 1960 to 1975 created and supported the concept of an efficient market, whereas the second phase, much of which is summarized in this book, began in the late 1970s and documented anomalies that were inconsistent with the efficient market paradigm.

Both phases had a dramatic impact on equity investing: The result of the first phase was the development of index funds. As a direct consequence of the early academic research, in 1973 Wells Fargo Investment Advisors working with Bill Sharpe of Stanford, and American National bank working with students of Eugene Fama from the University of Chicago created and offered the first index funds to their institutional clients. A year later Vanguard launched the first mutual fund designed to ...

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