In order to understand how to win the game you first need to understand the rules of the game so lets start by first explaining how ranking is assessed.
The rules of fund rating
On the SharingAlpha platform you are asked to rate the fund's chances of beating its benchmark. A 5 stars rating means that you believe the fund will significantly outperform it's benchmark.
For example, in case you expect the fund to return 15% and the ETF to return 10% then in such a case you expect the fund will perform 50% better than the comparable ETF. In this case you should probably give the highest star rating.
On a regular basis we gather all your ratings and see how well your assessment has materialized. The closer your assessment is to the real results, the higher the score you get for this rating. We call this the Hit ratio.
We compare your overall Hit ratio relative to the other users on SharingAlpha and then split this into 4 ranking groups, from the top Triple Alpha down to no Alpha at all.
Therefore, the ability to judge the funds that will perform better or worse than their benchmark is the key to achieving a high SharingAlpha rating.
The rules of asset allocation
Beyond the possibility of building your fund selection track record, SharingAlpha offers you the possibility of building a track record in terms of your asset allocation capabilities through our virtual fund of funds.
You can simultaneously manage 3 different fund of funds that differ by their risk profile (conservative, balanced and aggressive).
Every month SharingAlpha compares the performance you achieved relative to others that have also constructed a fund of funds. We compare the return and the stability of those returns.
These 2 factors determine your Asset Allocation Ranking which is divided into 3 groups: Gold, Silver and Bronze.
Taking these factors in mind, we offer 5 tips to improve your track record:
1. Rate correctly
Obviously, factors such as cost or active share effect the chances of beating the benchmark. The more expensive it is the harder it gets to achieve alpha. Similarly, beware of 'index closet' funds that have a very low active share and charge relatively high fees.
Keep in mind that even though you are can rate ETFs, the rating will not be taken into account in the calculation of your SharingAlpha ranking. As we compare fund performance against an index, ETFs and Index Funds are most likely to provide very similar returns to their index making them a 'sure thing' and thus can distort the ranking.
Nevertheless, rating ETFs and Index Funds will enable you to use them in the construction of your virtual fund of funds.
2. Allocate correctly
In order to increase your chances of ending up with a top ranking it is important not only to allocate to the best performing categories and funds but also to find the right balance that will lower the overall volatility.
In addition, it is important to keep in mind that if you choose a fund which isn't USD hedged then you are taking a currency position which could dramatically effect your performance.
3. Rate more
This is Statistics 101, the more funds you rate the more stable your Alpha score will become.
4. Follow attribution
In order to improve your future performance it's important to follow your attribution report and see what has worked for you and what hasn't.
5. Start early
Since a longer track record has greater significance SharingAlpha provides an extra weighting to ratings that have matched actual fund performance over the long terms.
"Someone’s sitting in the shade today because someone planted a tree a long time ago" - Warren Buffett
SharingAlpha isn't only a tool that allows you to build your own proven track record, it's also a tool that allows you to monitor your decisions and learn about your relative strengths and weaknesses. The more you use it the more it will give back in return.