Arbitrage Pricing Theory (APT)
IFI finds that market prices are the most efficient means of incorporating the rational, forward-looking expectations of market participants - those with their own (or their clients') money on the line. Prices are objective and contain implicit forecasts of financial returns and risks. Further, markets are both global and interconnected.
IFI integrates these inputs using APT, a quantitative method that uncovers causal connections between asset classes (including signals from futures and options markets) and points investors toward profitable strategies. IFI's models do not rely on unrealistic theories (such as the Capital Asset Pricing Model), on backward-looking and flawed statistics issued by government or on the presumption of "market failure" (such as the "bubble" myth).
Modern Portfolio Theory (MPT)
IFI recognizes and exploits the vast historical evidence demonstrating that over 80% of managers' performance is determined by initial asset allocations, whether among stocks, bonds and cash or within sub-sets of major asset classes. Stock-picking and "market-timing" techniques, while not irrelevant to performance, are usually overwhelmed by longer-term and broader shifts in the returns from major asset classes. Reliable forecasts of the returns and risks likely to be generated by broad asset classes necessarily benefit performance-oriented investors.
IFI does not endorse portfolio diversification for its own sake, or as a default position reflecting agnosticism about the future. In some cases, "big bets" are fully - and conservatively - justified by a given juxtaposition of market prices.
Markets are Efficient and Forecastable
Advocates of efficient markets insist that financial asset returns are a cause-less, "random walk" and that investment managers cannot, therefore, consistently outperform benchmarks through superior forecasts. They advise a passive strategy of buying, holding and re-balancing. Those who believe, in contrast, that managers can actively out-perform, tend to do so by claiming markets are irrational and perpetually mispriced.
IFI believes this is a false alternative. Markets are both efficient and forecastable. Precisely because market prices are efficient integrators and anticipators of information relevant to security valuation, they also serve as high-quality inputs for reliable forecasting models.
New information requires revised valuations. Shifts in the "policy mix" are an important source of new information - for good or ill. Moreover, unavoidable time lags exist between movements in asset prices, not because markets are inefficient but because no productive process - be it the construction of a factory or the construction of an investment portfolio - can be finalized or adjusted instantaneously.
IFI uses objective, statistically-based market analysis to identify the causal and exploitable patterns that exist among market prices and asset classes. Our quantitative models are developed and tested by rigorous regression techniques. We advise investors against "single-market myopia" or the use of subjective "hunches," "data mining," emotionalism or na´ve, technical trend extrapolation devoid of causal significance.
IFI's models and forecasts incorporate the best elements of free market economics as well as fundamental and technical analysis. We recognize that the ultimate test of any forecasting system is its real-time, practical ability to help investors earn above-average profits in markets.