Quant Mashup - Alpha Architect
Tracking Error is a Feature, Not a Bug [Alpha Architect]
The benefits of diversification are well known. In fact, it’s been called the only free lunch in investing. Investors who seek to benefit from diversification of the sources of risk and return of their portfolios must accept that adding unique sources of risk means that their portfolio will
- 3 days ago, 24 Mar 2024, 10:27pm -
Breaking Bad Momentum Trends [Alpha Architect]
Perhaps the most well-documented and researched asset pricing anomaly is momentum—the tendency of past winner stocks to outperform past loser stocks over the next several months. While average time-series momentum (trend following) returns have been high, strategies employing trend following have
- 1 week ago, 17 Mar 2024, 10:14pm -
Betting on a Short Squeeze as Investment Strategy [Alpha Architect]
Academic research, including the studies “Do Investors Overpay for Stocks with Lottery-like Payoffs? An Examination of the Returns on OTC Stocks,” “Lottery Preference and Anomalies” and “Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households,” has found that
- 2 weeks ago, 11 Mar 2024, 08:32am -
Cut your losses: is it a good strategy? [Alpha Architect]
“Conventional wisdom” can be defined as ideas that are so accepted that they go unquestioned. Unfortunately, conventional wisdom is often wrong. Two examples are that millions of people once believed the conventional wisdom that the Earth is flat, and millions also believed that the Earth is the
- 3 weeks ago, 2 Mar 2024, 08:18pm -
Biotech stocks - is making a bet on them a lottery ticket? [Alpha Architect]
The academic research, including the 2023 studies “Lottery Preference and Anomalies” and “Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households,” the 2022 study “Lottery Demand and the Asset Growth Anomaly,” and the 2014 study “Do Investors Overpay for
- 1 month ago, 24 Feb 2024, 08:55pm -
Benchmark selection: addressing strategic distortions [Alpha Architect]
The paper aims to provide insights into the dynamics of benchmark selection, the effectiveness of Relative Performance Evaluation ( RPE ) incentivization, and the broader implications for fund performance and market competition. Self-Declared Benchmarks and Fund Manager Intent: “Cheating” or
- 1 month ago, 20 Feb 2024, 09:17pm -
On the Persistence of Growth and Value Stocks [Alpha Architect]
Expectations of future earnings growth matter a great deal to valuations because investors, in their collective wisdom, assign higher valuations to companies they expect will grow more quickly in the future (growth stocks). In contrast, firms expected to show slower growth (value stocks) are
- 1 month ago, 17 Feb 2024, 07:16am -
ChatGPT - can it be used to select investments? [Alpha Architect]
One use of the NLP (natural language processing) features of ChatGPT is to search out patterns in the immense amounts of news, data and other sources of information about specific stocks, and then efficiently convert them into summaries valuable for all types of investors. Can this be accomplished
- 1 month ago, 12 Feb 2024, 08:13pm -
Band of Brothers Attacking Short Sellers: Game Stop for Hedge Funds [Alpha Architect]
In our book The Incredible Shrinking Alpha, Andrew Berkin and I presented the evidence demonstrating that the markets have become more efficient over time, making it more difficult to outperform the market on a risk-adjusted basis. Market efficiency explains the lack of persistent outperformance of
- 1 month ago, 11 Feb 2024, 05:14am -
Trend to Passive Investing Negatively Affecting Active Funds [Alpha Architect]
In our book, “The Incredible Shrinking Alpha,” Andrew Berkin and I identified four key trends that were increasing the hurdles for active managers in their quest to generate alpha: Academic research has been converting what was once alpha into beta (common factors that could be accessed at much
- 1 month ago, 2 Feb 2024, 06:20pm -
Institutional portfolio managers - better at buying or selling? [Alpha Architect]
What are the Research Questions? This paper examines the decisions of sophisticated market participants – experienced institutional portfolio managers (PMs) – and the authors ask the following questions: Is there a significant difference in performance between buying and selling decisions made
- 1 month ago, 29 Jan 2024, 10:17pm -
Moving Average Distance and Time-Series Momentum [Alpha Architect]
Because of the strong evidence, momentum continues to receive much attention from researchers. Out of the hundreds of exhibits in the factor zoo, one of just five equity factors that met all the criteria (persistent, pervasive, robust, implementable, and intuitive) Andrew Berkin and I established in
- 2 months ago, 28 Jan 2024, 02:48am -
Outperforming Cap- (Value-) Weighted and Equal-Weighted Portfolios [Alpha Architect]
Popular benchmarks in academic research studies to evaluate the performance of investment strategies are cap-weighted (market-, or value-weighted), and equal-weighted portfolios. Capitalization-weighted portfolios are used because they are the simplest and cheapest to implement, representing the
- 2 months ago, 22 Jan 2024, 08:51pm -
Peer-Reviewed Theory and Expected Stock Returns [Alpha Architect]
As professor John Cochrane observed, the literature on investment factors now fills a veritable “factor zoo,” with hundreds of options. How do investors select from among this huge array of possibilities? In order to minimize the risk that outcomes result from data mining, in our book “Your
- 2 months ago, 12 Jan 2024, 10:39pm -
Defensive factor strategy - how do you build one? [Alpha Architect]
Is there a defensive equity factor? Can one be built? Although it seems like an easy question, the answer is not straightforward. The authors of this piece argue for a careful assessment of factor strategies to deliver a defensive profile convincing enough to attract investors. A defensive
- 2 months ago, 9 Jan 2024, 07:25am -
Crowded Trades Increase Crash Risks [Alpha Architect]
Arbitrageurs keep markets efficient by moving prices to reflect their fundamental values. However, anomalies can persist because of limits to arbitrage—the costs and risks of shorting. The costs and risks of shorting, however, are not the only risks that arbitrageurs face. The publication of
- 2 months ago, 5 Jan 2024, 08:22pm -
The Financial Distress Puzzle [Alpha Architect]
That riskier assets should command higher expected returns is the most basic of asset pricing theories. Clearly, financial distress is a risk characteristic, but it presents a puzzle, as there has not been a linear relationship between it and stock returns. For example, John Birge and Yi Zhang,
- 2 months ago, 30 Dec 2023, 03:16am -
Are stock returns predictable at different points in time? [Alpha Architect]
The question of whether stock returns are predictable is of long-standing interest to both academics and investment practitioners. Commonly accepted investment strategies, for example, will behave quite differently in the presence of stock return predictability. The research literature is unclear on
- 3 months ago, 26 Dec 2023, 07:13pm -
Momentum Everywhere, Including Equity Options [Alpha Architect]
Because of the strong evidence, momentum continues to receive much attention from researchers. Out of the hundreds of exhibits in the factor zoo, one of just five equity factors that met all the criteria (persistent, pervasive, robust, implementable, and intuitive) Andrew Berkin and I established in
- 3 months ago, 26 Dec 2023, 07:12pm -
Can Machine Learning help to select mutual funds with positive alpha? [Alpha Architect]
The study emphasizes the importance of integrating machine learning with other tools for investment managers, pension-plan administrators, financial advisors, and independent analysts to help investors select active mutual funds with positive alpha. It also highlights the significance of fund
- 3 months ago, 19 Dec 2023, 06:51pm -
The Temptation of Factor Timing [Alpha Architect]
The timing of equity factor premiums has a strong allure for investors because academic research has found that factor premiums are both time-varying and dependent on the economic cycle. For example, Arnav Sheth and Tee Lim, authors of the December 2017 study “Fama-French Factors and Business
- 3 months ago, 16 Dec 2023, 06:05pm -
Diseconomies of Scale in Investing [Alpha Architect]
Abstract: One of the problems for investment funds is that success contains the seeds of destruction as cash inflows follow outperformance. In his seminal 2005 paper, “Five Myths of Active Portfolio Management,” Jonathan Berk suggested asking, “Who gets money to manage?” He answered that
- 3 months ago, 9 Dec 2023, 04:06am -
After-Tax Performance of Actively Managed Funds [Alpha Architect]
Market efficiency, higher trading costs and higher expense ratios are not the only hurdles to successful active management (market timing and individual security selection). For taxable investors, the burden of higher taxes raises the hurdle.(1) From 2002 until now, S&P Dow Jones Indices has
- 3 months ago, 6 Dec 2023, 04:37pm -
Overlapping Momentum Stocks - do they cause outperformance? [Alpha Architect]
Momentum investors utilize different timeframes to identify high momentum equities: past 6, 9, 12 months as an example. Obviously, there is a significant degree of overlap in momentum stocks identified across various past time frames. However, there has been little research focused on understanding
- 3 months ago, 28 Nov 2023, 10:48pm -
Covered calls: are investors making a devil's bargain? [Alpha Architect]
Many retail investors focus on generating what they consider to be income, leading to the popularity of dividend-focused strategies. To take advantage of this demand, investment firms have marketed covered call strategies that are purported to not only generate income but also reduce volatility.
- 4 months ago, 26 Nov 2023, 04:43pm -
Inflation surges - how long to return to normal? [Alpha Architect]
How long will it take for the current level of inflation to subside? If history is any guide, it could take quite a while. Across 198 policy interest rate hikes of at least 1%, a decrease of 1% in inflation took 2 to 4 years (Havranke and Rusnak, 2013). The authors of this research article conduct
- 4 months ago, 14 Nov 2023, 09:37pm -
The Performance of Major Private Equity/LBO Firms [Alpha Architect]
Attracted by the glamour and potential for lottery-like returns, global private equity (PE) assets under management reached $4.2 trillion in 2022. PE involves pooling capital to invest in private companies by providing venture capital (VC) to startups or by taking over and restructuring mature firms
- 4 months ago, 11 Nov 2023, 05:22pm -
Organization Capital and the Cross-Section of Expected Returns [Alpha Architect]
This paper focuses on “organization capital,” representing intangible assets in a firm’s key employees that is not captured by classic value measures such as book-to-market. The authors propose a structural model to analyze the impact of organizational capital on asset prices and argue that
- 4 months ago, 6 Nov 2023, 10:20pm -
Technology Spillover Impacts Stock Returns [Alpha Architect]
The increasing role of intangible assets compared to physical assets in our economy has been accompanied by increased research into their impact on asset prices and returns. Studies such as the 2020 papers “Explaining the Recent Failure of Value Investing,” “Intangible Capital and the Value
- 4 months ago, 6 Nov 2023, 10:19pm -
Dissecting the Idiosyncratic Volatility Puzzle [Alpha Architect]
Idiosyncratic volatility (IVOL) is the volatility of a security that cannot be explained by overall market volatility—it is the risk unique to a particular security. IVOL contrasts with systematic risk, which is the risk that affects all securities in a market (such as changes in interest rates or
- 4 months ago, 29 Oct 2023, 10:13pm -
Unmasking Insights through Human-AI Differences in Earnings Conference Q&A [Alpha Architect]
This paper acknowledges the pivotal role of earnings calls in disseminating value-relevant information, with particular emphasis on the Q&A segment. However, it confronts the inherent challenge posed by the unstructured nature of language in these calls, complicating quantitative analysis. In
- 5 months ago, 23 Oct 2023, 11:12pm -
Momentum Research: a summary: high quality articles of note [Alpha Architect]
The Jegadeesh and Titman (1993) paper on momentum established that an equity trading strategy consisting of buying past winners and selling past losers, reliably produced risk-adjusted excess returns. The Jegadeesh results have been replicated in international markets and across asset classes. As
- 5 months ago, 17 Oct 2023, 12:56am -
Trend-Following Filters – Part 7 [Alpha Architect]
Financial time series that are structured as data sampled at a uniform time interval, e.g., hourly, daily, weekly, or monthly, are called discrete-time time series and referred to, from a digital signal processing (DSP) perspective, as being in the “time domain.” Technical market analysts
- 5 months ago, 13 Oct 2023, 07:47pm -
International Value Stocks Offering "More Bang for the Buck" [Alpha Architect]
Over the very long term, while value stocks have been less profitable and have had slower growth in earnings than growth stocks, they have provided higher returns. Among the reasons are that value stocks have traded at substantial valuation discounts compared to growth stocks, and reversion to the
- 5 months ago, 6 Oct 2023, 01:10am -
ETF Evolution: what does it mean for investors? [Alpha Architect]
The first ETFs emerged in 1993 and closely tracked broad-based indexes for a low fee. Since then, the competitive situation in the ETF industry today has differentiated itself by adding a new breed of ETFs that reflected specialization into popular investment themes. When the evolution of the ETF
- 5 months ago, 2 Oct 2023, 10:59pm -
ESG Preferences Negatively Affecting Market Efficiency [Alpha Architect]
Environmental, social, and governance (ESG) investing continues to increase in popularity, with many institutional and individual investors incorporating ESG criteria into their investment decision-making process. Three main themes have driven this massive shift of assets: 1) Many investors are
- 5 months ago, 2 Oct 2023, 10:59pm -
Geographic investing: business activity vs. domicile [Alpha Architect]
The article explores the limitations of traditional country-level stock market indexes constructed based on issuing firms’ domicile. Additionally, it introduces a new type of national stock market index called the EMindex, which is based on companies’ business activities rather than their
- 6 months ago, 27 Sep 2023, 11:34pm -
R&D stocks - do asset pricing models do them justice? [Alpha Architect]
Since the development of the CAPM, which explains about two-thirds of the variation of returns among diversified portfolios, academic research has attempted to find models that increase the explanatory power of the cross-section of stock returns. Models are not like cameras that provide an exact
- 6 months ago, 25 Sep 2023, 09:13am -
A New Wolf in Town? Pump-and-Dump Manipulation in Cryptocurrency Markets [Alpha Architect]
Pump-and-Dump (P&D) schemes to manipulate the prices of cryptocurrencies are unlike the P&D schemes found in the equity market. They produce very large price distortions on the order of 65%, very large trading volumes of 13.5x the average, and generate very large profits to cryptocurrency
- 6 months ago, 18 Sep 2023, 10:23pm -
Momentum turning points and their impact on market cycles [Alpha Architect]
The article investigates time-series (TS) momentum strategies and their performance in financial markets based on various speeds or lookback horizons. The study aims to understand the connections between different speeds of TS momentum, unobservable variables like trend, turning points, and noise
- 6 months ago, 11 Sep 2023, 10:58pm -
Stock-bond correlation and its lessons for investors [Alpha Architect]
The correlation between stocks and bonds should be a critical component of any asset allocation decision, as it impacts not only the overall risk of a diversified multi-asset class portfolio but also the risk premia one should expect to receive for taking risk in different asset classes. The problem
- 6 months ago, 8 Sep 2023, 09:07pm -
Short Term Signals - can they produce meaningful alpha? [Alpha Architect]
Short-term return anomalies are generally dismissed in the academic literature “because they seemingly do not survive after accounting for market frictions.” In this research, short-term “factors” are taken seriously, and the authors argue the standard parameters may not apply to short
- 6 months ago, 5 Sep 2023, 05:26pm -
The Investment Factor: does it impact returns? [Alpha Architect]
Over the long term, low-investment firms have outperformed high-investment firms. This finding has led to the investment factor (CMA, or conservative minus aggressive) being incorporated into the leading asset pricing models—the four-factor q-theory model (market beta, size, investment, and
- 6 months ago, 2 Sep 2023, 06:33pm -
The determinants of inflation [Alpha Architect]
The research questions of the article are as follows: How can a Hidden Markov Model be applied to identify regimes of shifting inflation? What are the characteristics and descriptive information of the identified inflation regimes? Which economic variables are the determinants of inflation and how
- 6 months ago, 28 Aug 2023, 10:40pm -
Structured notes: Wall Street fairy tales that should be avoided! [Alpha Architect]
As a general rule of thumb, the more complexity that exists in a Wall Street creation, the faster and farther investors should run. —David Swensen, Unconventional Success Structured products are packages of synthetic investment instruments specifically designed to appeal to needs that investors
- 7 months ago, 26 Aug 2023, 05:57pm -
Factor seasonality - an independent risk factor? [Alpha Architect]
Factor seasonality always seemed to be an idea that was too close to factor timing to help build factor strategies. Surprisingly, the authors find a substantial factor seasonality effect across global markets, suggesting that the assumption is unwarranted. This is the first study I have encountered
- 7 months ago, 21 Aug 2023, 05:47pm -
Value and Profitability/Quality: Complementary Factors [Alpha Architect]
In his 2012 paper “The Other Side of Value: The Gross Profitability Premium,” Robert Novy-Marx demonstrated that profitability, as measured by gross profits-to-assets, had roughly the same power as book-to-market (value factor) in predicting the cross-section of average returns – profitable
- 7 months ago, 11 Aug 2023, 09:03pm -
Investor demand: can it explain returns? [Alpha Architect]
The traditional financial theory attributes security returns to market- or factor-based risk, with no role ascribed to other influences. In this research, the authors argue for including investor demand as an additional variable in explaining returns. Can changes in investor demand generate
- 7 months ago, 8 Aug 2023, 12:46am -
The Low-Beta Anomaly: are its returns justified? [Alpha Architect]
The low-beta anomaly for the capital asset pricing model (CAPM)—low-beta stocks outperform high-beta stocks—was first documented more than 50 years ago by Fischer Black, Michael Jensen, and Myron Scholes in their 1972 paper, “The Capital Asset Pricing Model: Some Empirical Tests.” In our
- 7 months ago, 5 Aug 2023, 07:00pm -
Retail attention metrics: do they produce differences in returns? [Alpha Architect]
Abstract: We find that by using a novel measure of investor attention, generated from InvestingChannel’s clickstream data on online financial news consumption, we can identify broad groups of stocks which are less efficiently priced and therefore where anomalies such as Value and Momentum are
- 7 months ago, 28 Jul 2023, 07:37pm -