M6 investment challenge: The role of luck and strategic considerations

Abstract

This article investigates the influence of luck and strategic considerations on the 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. These findings are consistent with the efficient-market hypothesis, reinforcing the notion that any apparent outperformance is indistinguishable from statistical noise. 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 constructing a portfolio that deviates from the strategies of competitors. Empirical analysis of submitted portfolios shows that teams that differentiated themselves from competitors by holding a higher proportion of short positions were more than eight times as likely to secure a top rank, aligning with findings from the stylized model.