Quant Mashup - Alpha Architect
Monster Factor Correlation Chart [Alpha Architect]
We recently added a monster correlation matrix to our factor library data sheet that maps out the correlation of all the factors against every other factor. Here is a sample output that highlights the difference in the correlations between value factors and different quality factors. Note the big
- 4 years ago, 12 Jun 2020, 12:53pm -
5 Surprising Things We Learned from a Factor Investing Expert [Alpha Architect]
Lu Zhang and his colleagues made some waves with their new paper, “Replicating Anomalies.” (now published in the RFS — congrats!). We have a summary of the paper here. Lu Zhang, and his colleagues, Kewei Hou and Chen Xue, spent nearly 3 years carefully compiling and replicating 447
- 4 years ago, 11 Jun 2020, 12:29pm -
Counterpoint: ETF Activity May Make the Stock Market MORE Efficient [Alpha Architect]
The Securities and Exchange Commission (SEC) has called for more research and discussion on the impacts of ETFs. In a previous post, we covered why ETF’s have not screwed up correlations, liquidity, and alpha opportunities. However, here is another post from Wes that outlines arguments that ETFs
- 4 years ago, 8 Jun 2020, 11:08pm -
Excess Returns Podcast: Systematic Value Investing [Alpha Architect]
Recently I was invited to talk with Justin and Jack on the Excess Returns Podcast. I thank them for the opportunity and enjoyed the conversation! Below are some of the topics we discussed: Struggles in value and its long-term potential going forward. What would it take to convince you that value
- 4 years ago, 5 Jun 2020, 10:13am -
Do Interest Rates Explain Value’s Underperformance? [Alpha Architect]
From January 2017 through March 2020, the value premium, defined by HML (the return of high book-to-market stocks minus the return of low book-to-market stocks experienced a drawdown of 42 percent. 1 If we extend the period back to January 2007, the drawdown of about 51 percent is the largest ever.
- 4 years ago, 4 Jun 2020, 01:15pm -
Is value dead? Has the story changed? No. [Alpha Architect]
Although there is widespread agreement that systematic value strategies have turned in at least a decade of underperformance, there is little agreement as to the underlying cause or cause(s). However, a number of rationalizations and critiques have emerged that question the long term viability of
- 4 years ago, 2 Jun 2020, 01:58am -
Smart(er) Investing - The Easy Way [Alpha Architect]
Most of the time we make you “earn your education” by reading our posts to build up your knowledge of the latest and greatest academic research concepts. That said, we understand there are different ways to educate, which is why we’re experimenting with video and audio. In the videos below, 3
- 4 years ago, 29 May 2020, 01:15pm -
Tactically Adjusting Everything in a Financial Crisis? Bad Idea. [Alpha Architect]
With the current market conditions and the wild ride we’ve all been on, we’ve pivoted our attention to focus on supplying academic research on responding to a crisis. This article investigates what the appropriate tactical adjustments investors should consider when making changes to their
- 4 years ago, 26 May 2020, 11:35am -
Prospect Theory Helps Explain Return Anomalies [Alpha Architect]
The field of behavioral finance provides us with fascinating insights into individual investor behavior, including how individuals view risk, as well as the impact of those views on asset prices. Prospect theory plays a major role in explaining investor behavior. The theory, formulated in 1979 by
- 4 years ago, 19 May 2020, 12:11pm -
Trend Following the S&P 500? Some Practical Advice [Alpha Architect]
Now that market volatility is back, tail risk management strategies are gaining some attention. A lot of investors are dipping their toe into the water and exploring trend-following strategies on the S&P 500 — arguably the most popular U.S. stock market index.This paper explores multiple trend
- 4 years ago, 19 May 2020, 10:31am -
Discussion: Managing the Costs of Passively Investing in Active Strategies [Alpha Architect]
We recently covered a paper by David Blitz that highlighted the potential problems with passively investing in “active” strategies. The research piece is great and surfaces a lot of great concepts. Like a lot of research we publish/summarize this article appears to “shoot Alpha Architect in
- 4 years ago, 15 May 2020, 09:38am -
Academic Finance Research Galore. WFA Sessions Announced [Alpha Architect]
Attention all finance geeks. The latest and greatest from academic researchers is available for all to review. The WFA recently released their sessions. WFA is one of the more prestigious academic conferences and papers presented at the conference often find their way into top-tier academic
- 4 years ago, 14 May 2020, 10:12am -
Machine Learning and Investing: Forecasting Fundamentals w/ Ensembles [Alpha Architect]
Quantitative factor portfolios generally use historical company fundamental data in portfolio construction. The key assumption behind this approach is that past fundamentals proxy for elements of risk and/or systematic mispricing. However, what if we could forecast fundamentals, with a small margin
- 4 years ago, 13 May 2020, 01:37pm -
Skulls, Financial Turbulence and Risk Management [Alpha Architect]
When hunting for diversity, the typical investor considers only average correlations. However, when measuring an asset’s diversification benefits utilizing average correlations tend to mislead investors. For example, when both U.S. and non-U.S. equities produce returns greater than one standard
- 4 years ago, 12 May 2020, 10:05am -
The Size Effect in Multifactor Portfolios [Alpha Architect]
The lack of a statistically significant size premium in the U.S. since the publication of Rolf Banz’s 1981 paper, “The Relationship Between Return and Market Value of Common Stocks,” published in the Journal of Financial Economics, led many investors to question its use in building portfolios.
- 4 years ago, 7 May 2020, 02:53pm -
Cheap vs. Expensive Factors: Does Valuation Matter for Future Returns? [Alpha Architect]
Tesla (TSLA) breached the $100 billion market capitalization in January 2020 and became the most valuable car manufacturer globally. However, valuing the company is challenging given the growth profile, complexity of the business, and erratic CEO. It is not yet profitable and cash flow is negative,
- 4 years ago, 5 May 2020, 01:53pm -
Why Passively Investing in Active Methods May Not Work [Alpha Architect]
In this piece, David Blitz provides an interesting perspective on using the passive framework as a blueprint for constructing active (ETF-like) products. The article is not an empirical (no charts!) nor a theoretical (no analytics) analysis, but is focused on just one question: Is it efficient to
- 4 years ago, 5 May 2020, 09:29am -
What's the Story Behind EBIT/TEV? [Alpha Architect]
A common question we receive at Alpha Architect is the following: Why do you focus on EBIT/TEV as a value screen for stocks instead of the more traditional measures such as book to price? In short, we believe stocks are ownerships in businesses (I know that sounds crazy coming from a quant shop!).
- 4 years ago, 1 May 2020, 02:50pm -
Ways to Measure Extreme Downside Risk [Alpha Architect]
Larry Swedroe recently wrote a post titled “Is there a Tail Risk Premium in Stocks.” This post is a good complement to Larry’s as this paper proposes two new measures of systematic tail risk and explores whether they are associated with a significant risk premium. The first measure, Extreme
- 4 years ago, 28 Apr 2020, 10:46am -
Trend Following is Everywhere [Alpha Architect]
Similar to some better-known factors, such as size and value, time-series momentum (TSMOM) historically has demonstrated abnormal excess returns. For the less familiar with trend following it’s worth your time to review Alpha Architects white paper on trend following here. TSMOM is measured by a
- 4 years ago, 23 Apr 2020, 12:32pm -
How to Compute Active Share [Alpha Architect]
In the short video below, I show how to compute Active Share. The accompanying excel file with the formulas can be found here. I start by computing the active share for two hypothetical funds, and then examine the active share of a few live ETFs.
- 4 years ago, 22 Apr 2020, 12:20pm -
Estimating Pandemic Economic Costs for "Face-to-Face" Businesses [Alpha Architect]
To describe the impact of social distancing, a theory of communication is developed and described comprehensively in this article. The focus is on the relative importance of worker interactions, the cost of those interactions and their impact on the size of wage subsidies intended as compensation
- 4 years ago, 20 Apr 2020, 02:37pm -
Dividends, Stock Prices, and Inflation [Alpha Architect]
Building on the concepts presented in my Dividends Are Different article, here we present data and observations highlighting the relationship between inflation and 1) company fundamentals, 2) dividends, and 3) stock market movements. 1 We look at empirical data to investigate how inflation relates
- 4 years ago, 17 Apr 2020, 09:56pm -
Attention Data Geeks: Our Factor Investing Data Library is Open [Alpha Architect]
Are you doing independent factor research? Have you spent countless hours on Ken French’s website? Do you run factor regressions for “fun”? Congrats — you are officially a finance geek and you will probably benefit from our new factor investing library. Our library has over 300 factors to
- 4 years ago, 17 Apr 2020, 12:09pm -
Is There a Tail Risk Premium in Stocks? [Alpha Architect]
It has been well documented both that stock returns have much fatter tails than a normal distribution would generate, and that tail events occur much more frequently than a normal curve would predict. 1 For example, Benoit Mandelbroit and Richard Hudson examined the daily index movements of the Dow
- 4 years ago, 16 Apr 2020, 12:59pm -
Trend Following Reality: You Need Trends to Trend-Follow [Alpha Architect]
Trend Following, as an investing strategy has delivered strong performance during market chaos (e.g., Global Financial Crisis of 2007–2009), but the strategy has gone through a significant drawdown (save the last few months where things are perking up!). We have seen dismal returns in the recent
- 4 years ago, 14 Apr 2020, 12:49pm -
Daily vs. Monthly Trend-Following Rules...Plus Some DIY Tools! [Alpha Architect]
Trend-following strategies are a lot like stock-picking strategies — there are endless approaches and varying levels of complexity. In this short piece, we explore the decision related to implementing basic trend-following strategies on either a daily or a monthly basis. Many traders intuitively
- 4 years ago, 8 Apr 2020, 11:17am -
Volatility, Risk Management, and Market Chaos: Research that Might Help [Alpha Architect]
Given the recent market decline, we thought it would be helpful to review some of our blog posts from the past that may be relevant to the current crisis atmosphere. These posts focus on research that explores investment strategies that are believed to help investors manage risk and diversify their
- 4 years ago, 6 Apr 2020, 10:21pm -
Pandemics and Factor Investing: A Glimpse into the Past [Alpha Architect]
When I was in the Marines we were “voluntold” to read a lot on the history of warfare. This mandate came from General Mattis’ desire that we lean on the 5,000+ years of fighting experience amongst us illustrious humans. Of course, history never tells you exactly what will happen in the future,
- 4 years ago, 4 Apr 2020, 01:10pm -
Volatility Expectations and Returns [Alpha Architect]
A large body of research, including the 2017 study “Tail Risk Mitigation with Managed Volatility Strategies” by Anna Dreyer and Stefan Hubrich, demonstrates that while past returns do not predict future returns, past volatility largely predicts future near-term volatility, i.e., volatility is
- 4 years ago, 2 Apr 2020, 12:34pm -
An Empirical Challenge for Trend-Following [Alpha Architect]
There is ample evidence in the literature that stock past returns predict future returns. One of the most comprehensive studies is Moskowitz et al. (2012), which shows that time-series momentum (TSM) is everywhere (they test it on 55 assets). 1 Later studies confirmed the results on even a broader
- 5 years ago, 30 Mar 2020, 10:09pm -
Corporate Governance, ESG, and Stock Returns around the World [Alpha Architect]
Figuring out exactly how to score companies on social issues isn’t as simple as tossing around a universal “ESG Ratio” that works for all. Instead, we have to dig into the details and find the nuanced answer to discover which companies are performing and delivering on social issues. This paper
- 5 years ago, 29 Mar 2020, 12:27pm -
Is There Something Wrong with the Value Premium? [Alpha Architect]
The dramatic underperformance of the value premium since 2018, among the largest drawdowns in history, has led many to question its existence. It is certainly possible that what economists call a “regime change” could cause assumptions for why the premium should exist/persist to have changed.
- 5 years ago, 24 Mar 2020, 12:31pm -
The Use and Value of Financial Advice for Retirement Planning: Part 1/2 [Alpha Architect]
What are the Research Questions? Planning for the expenditures needed to fund a successful retirement is one of the most important tasks individuals face, and it’s not an easy one. In fact, it is pretty common (and smart) for some investors to turn to a professional advisor to help guide them
- 5 years ago, 17 Mar 2020, 01:01pm -
Low Volatility-Momentum Versus Value-Momentum Factor Portfolios [Alpha Architect]
If an investor would state today that in ten or twenty years most portfolios would include an allocation to cryptocurrencies, they would likely be laughed at. However, a similar response would have been encountered in the Internet Bubble and someone proposed to invest in low-risk stocks. During that
- 5 years ago, 14 Mar 2020, 01:29pm -
Do Insider Trades Provide Insights into Future Returns? [Alpha Architect]
The volume of work that has been done on insider transactions is not inconsequential, we’ve covered a variety of research on the topic in several blog posts just a few of which are here and here. This is the first time we observe corporate insider’s ability to overcome biases as an indicator of
- 5 years ago, 11 Mar 2020, 01:05pm -
What to Do When Alpha Becomes Beta [Alpha Architect]
In this article, the author argues that alternative risk premia (ARP) strategies undergo an evolution that begins with their inception as a pure alpha -based strategy, continuing its metamorphosis into a pure beta strategy. The inevitable transformation is brought on by a number of factors and also
- 5 years ago, 11 Mar 2020, 01:05pm -
The Gap Between Large and Small Companies is Growing. Why? [Alpha Architect]
In my role as chief research officer for the Buckingham Family of Financial Services, I receive many questions from investors and advisors alike, asking me to address concerns they have that originate from articles they have read or statements they hear on the financial media. I thought it worth
- 5 years ago, 6 Mar 2020, 11:09am -
How do Institutional Investors approach Climate Risks? [Alpha Architect]
Private and public companies face direct costs related to three types of climate risks: physical (i.e. extreme weather), regulatory (i.e. policies and regulations implemented to combat climate change), and technological (i.e. electric or fuel-cell-powered vehicles could disrupt traditional car
- 5 years ago, 2 Mar 2020, 12:32pm -
Smart Money Indicator Rebuttal [Alpha Architect]
In February 2019, Wes asked that I share my research on what I call the “Smart Money Indicator.” I did a guest post on the subject that summarized the results of a paper introducing my research on the topic. The indicator measures the relative sentiment in equities between institutional
- 5 years ago, 28 Feb 2020, 01:21pm -
Global Low Volatility and Momentum Factor Investing Portfolios [Alpha Architect]
A Springbok antelope can reach a top speed of 55 miles per hour in the African savanna, whereas the fastest human manages barely half that speed and only for a few meters. In a short race, we are left in the dust. However, we are built for endurance and can run for hours at an almost constant speed,
- 5 years ago, 28 Feb 2020, 05:25am -
Macroeconomic Risks in Equity Factor Investing: Part 2/2 [Alpha Architect]
What are the research questions? Although not a new topic, the first half of the article explored and documented the dependent relationship between factor returns and time-varying macroeconomic environments. In the second half of this paper, the authors provide insightful commentary and a renewed
- 5 years ago, 25 Feb 2020, 09:25am -
The Massive Performance Divergence Between Large Growth and Small Value Stocks [Alpha Architect]
From 2017 through 2019, the Russell 1000 Growth Index returned 20.5 percent per annum, outperforming the Russell 1000 Value Index, which returned 9.7 percent, by 10.8 percentage points a year; and the Russell 2000 Growth Index returned 12.5 percent per year, outperforming the Russell 2000 Value
- 5 years ago, 21 Feb 2020, 12:52pm -
Factor Investing Update: An Analysis of 2019 International Factor Returns [Alpha Architect]
Last week I summarized the 2019 factor performance for U.S. stocks. A natural follow-up question was the following–“what about International stocks?” A great question. So below I dig into the 2019 performance for International Factor Portfolios. 1 Let’s dig into the results. Factor Investing
- 5 years ago, 19 Feb 2020, 12:08pm -
Factor Investing Update: An Analysis of 2019 U.S. Factor Returns [Alpha Architect]
In case you missed it, 2019 was a good year to be an equity investor. Examining market-cap-weighted indices, the U.S. stock market was up ~ 30%, Developed International Markets were up ~ 22%, and Emerging Markets were up ~ 18%. But how did factors do in 2019? Below I update my post from last year,
- 5 years ago, 11 Feb 2020, 11:59am -
The Case Against REIT's [Alpha Architect]
Surveys often reveal investor behavior that is challenging to understand. For example, Preqin’s Alternative Investor Outlook for H2 2019 highlighted the following: 65% of institutional investors believe that real estate is overvalued and a correction likely to occur in 2019, 2020, or beyond.
- 5 years ago, 6 Feb 2020, 12:18pm -
Book Review: Smart(er) Investing by Elisabetta and Tommi [Alpha Architect]
It’s not often I get the opportunity to write a book review for our fellow teammates and the best authors on our website — Elisabetta Basilico and Tommi Johnsen! If you haven’t read Elisabetta and Tommi’s mountain of blog posts on our site you’ve been hiding under a rock somewhere (or
- 5 years ago, 4 Feb 2020, 11:34am -
Low Volatility-Momentum Factor Investing Portfolios [Alpha Architect]
Factor investing is hard and some factors make it harder than others. A value strategy results in a portfolio of stocks that exhibit temporary or structural issues and are usually rated “Sell” by brokers, which makes these emotionally challenging to hold. Small caps are companies that are
- 5 years ago, 31 Jan 2020, 09:54am -
The predictability of crowding on factor strategy performance [Alpha Architect]
The focus of this study is on the response of typical or systematic risk premia to crowding (large inflows of capital). In particular, the paper focused on documenting the response of commonly recognized systematic risk premia strategies to periods, following the identification of crowded
- 5 years ago, 29 Jan 2020, 09:06am -
How to Turn Cross-Sectional into Time-Series Momentum [Alpha Architect]
A point of confusion for many new quant momentum investors is the difference between Time- Series Momentum and Cross-Sectional Momentum: Time-series (TS) looks at each individual stock’s momentum and owns assets with positive momentum while shorting those with negative momentum; Cross-sectional
- 5 years ago, 26 Jan 2020, 11:16am -