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Matthias Knab, Opalesque:

Mark Rzepczynski, Founding Partner, Chief Investment Officer AMPHI Research and Trading, writes on Harvest Exchange:

How do you know whether a model is broken? Or, how do you conduct a model review? There are many specific steps for any review but there are four major questions that have to be addressed that are separate from risk management. The key question of model efficacy should focus on forecasting skill and action. Does the model forecast correctly and is the model employed properly to make good decisions.

1. Is the data used by the model correct or timely? There is a wealth of data that can be used for building a model, yet this key input can be subject to delays and revisions. Hence, the first place to look to see if a model is doing its job is with the data. Many managed futures managers focus on price for the simple reason it is easy to get the data. The data can be smoothed to obtain a signal and the process of obtaining price data is cheap and efficient. This provides tremendous benefits for the investor. The same cannot be said for fundamental data. Any model with fundamental data is likely to have a delay issue, so data review is important.

2. Is the model using the data correct? It is clear that many financial models can only explain a small portion of the variation of ......................

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