We outlined the full set of rules for the Newfound 2018 March Madness Brackets here.

We have two rounds in the bag in this year’s March Madness bracket competition, and what a wild ride it’s been:

  • 16 seed UMBC made history by beating 1 seed Virginia, edging them out by a mere 20 points…
  • The highest seed left in the South is 5 seed Kentucky paving a (possibly) easy route to the Final Four.
  • The Sweet Sixteen contains two 11 seeds (Loyola and Syracuse) and two 9 seeds (Florida St. and Kansas St.).
  • There was not a single 12 seed upset.

While we did not publish an update after the first round – how many people actually wanted to look at their bracket? – we can take a step back and see how the tournament has unfolded under our unique bracket scoring system.

As a quick refresher, participants allocated a portfolio of teams, where each team would earn a number of points per win that was inversely proportional to the number of games it was expected to win.

To encourage diversification, up to a 50% penalty was applied to very concentrated portfolios. Essentially, as long as you held at least 4 teams in equal amounts, you were okay on this. Being more diversified than that would lead to a possible 25% bonus.

Out of the 43 entries we received plus the five benchmarks, only one portfolio was at the 25% concentration, with most falling at 10% or below.

Thankfully, this means that no one put 100% of their portfolio in UMBC… phew!  In this current state of the world, they would have surely won despite the penalty.

As we expected, we saw most portfolios diversify with smaller positions in the lower seeded, but high point value, teams.  Some portfolios, however, did opt to be somewhat concentrated in these teams.

After the first round with the UMBC win, the value-tilted, seed weighted benchmark and the equal weight benchmark rocketed to the top. Score 1 for smart beta!

However, the battle for the active management title is still up for grabs.

Perhaps surprisingly, of the 6 entries that allocated some of their portfolios to UMBC, only one breached the top 10 after the first round.

On average, after round 1, participants had 65% of their portfolios still in the tournament. After round 2, this number dropped to 36%.

We have a weird Sweet Sixteen ahead of us later this week, but it’s still anyone’s game. While we can calculate the expected final rankings, we should recall that every single bracket had the same expected score at the beginning of our tournament. Deviations from what’s expected can have a large impact on the results.

The only certainties in these brackets are that:

  • The ones with 0% allocation left alive cannot score more points. There are no do-overs. The only thing left to do is hope that no one catches up.
  • The expected values are only a guideline, especially since a team cannot win a fraction of a game.
  • Any deviations from the expected number of wins from the lower seed teams could transform our top 10 dramatically.

We’ll check back in before the Final Four!

Nathan is a Portfolio Manager at Newfound Research, a quantitative asset manager offering a suite of separately managed accounts and mutual funds. At Newfound, Nathan is responsible for investment research, strategy development, and supporting the portfolio management team. Prior to joining Newfound, he was a chemical engineer at URS, a global engineering firm in the oil, natural gas, and biofuels industry where he was responsible for process simulation development, project economic analysis, and the creation of in-house software. Nathan holds a Master of Science in Computational Finance from Carnegie Mellon University and graduated summa cum laude from Case Western Reserve University with a Bachelor of Science in Chemical Engineering and a minor in Mathematics.