Today, August 28th, 2023, my company Newfound Research turns 15. It feels kind of absurd saying that. I know I’ve told this story before, but I never actually expected this company to turn into anything. I started the company while I was still in undergrad and I named it Newfound Research after a

In Return StackingTM: Strategies for Overcoming a Low Return Environment, we advocated for the addition of managed futures to traditionally allocated portfolios. We argued that managed futures’ low empirical correlation to both equities and bonds and its historically positive average returns makes

In Reimagining Index Funds (Arnott, Brightman, Liu and Nguyen 2023), the authors propose a new methodology for forming an index fund, designed to avoid the “buy high, sell low” behavior that can emerge in traditional index funds while retaining the depth of liquidity and capacity. Specifically,

Several years ago, I started using the phrase, “It’s long/short portfolios all the way down.” I think it’s clever. Spoiler: it has not caught on. The point I was trying to make is that the distance between any two portfolios can be measured as a long/short strategy. This simple point, in my

Much like in 2008, managed futures as an investment strategy had an impressive year in 2022. With most traditional asset classes struggling to navigate the inflationary macroeconomic environment, managed futures has been drawing interest as a potential diversifier. Managed futures is a hedge fund

We have published a new paper on the topic of rebalance timing luck in option strategies: The Hidden Cost in Costless Put-Spread Collars: Rebalance Timing Luck. Prior research and empirical investment results demonstrate that strategy performance can be highly sensitive to rebalance schedules, an

When we first started publicly writing and talking about capital efficiency in 2017 – the predecessor conversation to return stackingTM – the 13-week U.S. Treasury Bill rate sat around 1.30%. The prototypical example at the time was a 1.5x levered 60% stock / 40% bond portfolio (also referred to

This paper is unlike any research we’ve shared in the past. Within we dive into the circumstantial evidence surrounding the “weird” behavior many investors believe markets are exhibiting. We tackle narratives such as the impact of central bank intervention, the growing scale of passive /

We are proud to announce the release of our newest paper, Rebalance Timing Luck: The (Dumb) Luck of Smart Beta. Abstract Prior research and empirical investment results have shown that portfolio construction choices related to rebalance schedules may have non-trivial impacts on realized performance.

For hedging strategies, there is often a trade-off between degree, certainty, and cost. Put options have high certainty and typically offer a high degree of protection, making them costly to hold and roll over the long run. In this note, we briefly explore the application of different tactical

The convex payoff profile of trend following strategies naturally lends itself to comparative analysis with option strategies. To isolate the two extremes of paying for whipsaw – either up front or in arrears – we replicate an option strategy that buys 1-month at-the-money calls and puts based

The March 2020 equity market sell-off has caused many investors to re-investigate the potential benefits of tail risk hedging programs. Academic support for these programs is quite limited, and many research papers conclude that the cost of implementation for naïve put strategies out-weighs the

Defensive equity strategies are comprised of stocks that lose less than the market during bear markets while keeping up with the market during a bull market. Coarse sorts on metrics such as volatility, beta, value, and momentum lead to diversified portfolios but have mixed results in terms of their

The convex payoff profile of trend following strategies naturally lends itself to comparative analysis with option strategies. Unlike options, however, the payout of trend following is not guaranteed. To compare and contrast the two approaches, we replicate simple trend following strategies with

In past research we have explored the potential benefits of how-based diversification through the lens of pay-off functions. Specifically, we explored how strategic rebalancing created a concave payoff while momentum / trend-following created a convex payoff. By combining these two approaches, total

Since 2009, any decision to de-risk in a trend equity portfolio has largely been the wrong decision. At the time of writing, we implement a 1-month tranching process in most of our trend mandates, which has the effect of dollar-cost averaging signal changes over a 1-month period. We adopted this

There has been considerable speculation as to the shape of the market’s recovery. Practitioners have taken to using letters as short hand for the recovery they forecast. Whether the market makes a fast V-shaped recovery, a slower U-based formation, a W-style double-bottom, or an L-shaped reset is

About two years ago, we compared and contrasted different approaches to risk managing equity exposure; including fixed income, risk parity, managed futures, tactical equity, and options-based strategies. Given the recent market events as the world navigates through the COVID-19 crisis, we revisit

In this research note, we explore the performance of simple trend equity strategies and funds in the recent market rout. We find a significant dispersion in realized performance, with some strategies shifting entirely to cash at the end of February and some remaining entirely invested. We explain

During the week of February 23rd, the S&P 500 fell more than 10%. After a prolonged bullish period in equities, this tumultuous decline caused many trend-following signals to turn negative. As we would expect, short-term signals across a variety of models turned negative. However, we also saw

Prior academic and practitioner research suggests that factor-based fixed income investing can create attractive return profiles and be useful when building fixed income portfolios. Using an investment universe of eight domestic fixed income asset classes, we build dollar-neutral long-short

While rebalancing studies typically focus on the combination of different asset classes, we evaluate a combination of two naïve trend-following strategies. As expected, we find that a rebalanced fixed-mix of the two strategies generates a concave payoff profile. More interestingly, deriving the

A long/flat tactical equity strategy with a portable beta bond overlay – a tactical 90/60 portfolio – has many moving parts that can make attribution and analysis difficult. By decomposing the strategy into its passive holdings (a 50/50 stock/bond portfolio and U.S. Treasury futures) and active

At Newfound, we adopt a holistic view of diversification that encompasses not only what we invest in, but also how and when we make those investment decisions. In this three-dimensional perspective, what is correlation-based, how is payoff-based, and when is opportunity-based. In this piece, we

Managed futures strategies have historically provided meaningful positive returns during left-tail equity events. Yet as a trading strategy, this outcome is by no means guaranteed. While trend following is “mechanically convex,” the diverse nature of managed futures programs may actually prevent

U.S. equities have out-performed international equities for 8 of the past 10 years, but this trend has tended to flip-flop historically and persist for multi-year stretches. Home country bias is a real phenomenon that investors have to deal with, especially during these streaks where U.S. equities

Naïve value factor portfolios have been in a drawdown since 2007. More thoughtful implementations performed well after 2008, with many continuing to generate excess returns versus the market through 2016. Since 2017, however, most value portfolios have experienced a steep drawdown in their relative

Factors play an important role for quantitative portfolio construction. How a factor is defined and how a factor portfolio is constructed play important roles in the results achieved. Naively constructed portfolios – such as most “academic” factors – can lead to latent style exposures and

In 2019, we published 45 research notes (not including video + audio commentary), totaling over 100,000 words. Our research spanned a number of topics, including: ensemble techniques, deep dives on trend following, factor and sector rotation, fixed income analysis, and – of course – rebalance

Over the last several years, we have written several research notes demonstrating the potential benefits of diversifying “specification risk.” Specification risk occurs when an investment strategy is overly sensitive to the outcome of a single investment process or parameter choice. Adopting an

The Fama French three-factor model provides a powerful tool for assessing exposures to equity risk premia in investment strategies. In this note, we explore alternative specifications of the value (HML) and size (SMB) factors using price-to-earnings, price-to-cash flow, and dividend yield. Running

My guest today is … me. But rather than interview myself, my co-portfolio manager Nathan Faber joins the podcast to take the reigns. In this episode, we talk all things rebalance timing luck. It’s been an obsession of mine for years and something we believe to be a dramatically misunderstood and

In past research notes we have explored the impact of rebalance timing luck on strategic and tactical portfolios, even using our own Systematic Value methodology as a case study. In this note, we generate empirical timing luck estimates for a variety of specifications for simplified value, momentum,

We have shown previously that it is possible to time factors using value and momentum but that the benefit is not large. By constructing a simple model for factor timing, we examine what accuracy would be required to do better than a momentum-based timing strategy. While the accuracy required is not

While trend following may help investors avoid prolonged drawdowns, it is susceptible to whipsaw where false signals cause investors to either buy high and sell low (realizing losses) or sell low and buy high (a missed opportunity). Empirical evidence suggests that using economic data in the United

To generate returns that are different than the market, we must adopt a positioning that is different than the market. With the increasing adoption of systematic factor portfolios, we explore whether an anti-factor stance can generate contrarian-based profits. Specifically, we explore the idea of

After the Great Financial Crisis, the Momentum factor has exhibited positive returns, but those returns have been largely driven by the short side of the portfolio. One research note suggests that this is driven by increased risk aversion among investors, using the correlation of high volatility and

Yield curve changes over time can be decomposed into Level, Slope, and Curvature changes, and these changes can be used to construct portfolios. Market shocks, monetary policy, and preferences of different segments of investors (e,g. pensions) may create trends within these portfolios that can be

While it may be tempting to time allocations to active strategies, it is generally best to hold them as long-term allocations. Despite this, some research has shown that there may be certain economic environments where trend following equity strategies are better suited. In this commentary, we

While many investors have adopted a multi-factor approach to style investing, some have pushed these boundaries by advocating for an active, rotational approach to factor allocation. In a recent white paper, MSCI suggests several methods that might be conducive for performing style rotation,

Recent research suggests that equity factors exhibit positive autocorrelation, providing fertile ground for the application of trend-following strategies. In this research note, we ask whether the same techniques can be applied to the active returns of long-only style portfolios. We construct

Value and momentum equities exhibited significant performance last week raising short-term questions about factor crowding and long-term questions about appropriate factor diversification. We explore the idea of appropriate factor diversification through the lens of a retiring investor, asking the

We exploit the idea that long-only strategies are “long/short portfolios all the way down,” we demonstrate how to isolate the active bets of portfolio managers. Using the example of a momentum / low-volatility barbell portfolio, we construct a simple long/short portfolio using ETFs and S&P

We explore “top N” sector rotation strategies based upon momentum signals. We find that too much concentration (i.e. N is too small) leads to poor performance, whereas performance does not appear to materially degrade for larger N. We find that short- to long-term signals all appear to generate

Systematic value strategies have struggled in the post-2008 environment, so one that has performed well catches our eye. The Barclays Shiller CAPE sector rotation strategy – a value-based sector rotation strategy – has out-performed the S&P 500 by 267 basis points annualized since it

After stumbling across a set of old research notes from 2009 and 2012, we attempt to implement a Cyclicals versus Defensives sector trade out-of-sample. Post-2012 returns prove unconvincing and we find little evidence supporting the notion that PMI changes can be used for constructing this trade.

New research from Axioma suggests that tilting less – through lower target tracking error – can actually create more academically pure factor implementation in long-only portfolios. This research highlights an important question: how should long-only investors think about factor exposure in

The bond risk premium is the return that investors earn by investing in longer duration bonds. While the most common way that investors can access this return stream is through investing in bond portfolios, bonds often significantly de-risk portfolios and scale back returns. Investors who desire

We have shown many times that timing luck – when a portfolio chooses to rebalance – can have a large impact on the performance of tactical strategies. However, fundamental strategies like value portfolios are susceptible to timing luck, as well. Once the rebalance frequency of a strategy is set,