Quant Mashup - Factor Research
Crypto Tokens and Crypto Coins: What Drives Performance? [Factor Research]
Investors assume that token prices increase with product utilization in the token ecosystem However, the correlation between the token prices and token volumes has been zero Likely explained by token prices substantially being driven by speculation INTRODUCTION Much of the crypto world is, by
- 3 weeks ago, 26 Apr 2022, 03:29am -
Thematic Indices: Looking at the Past or the Future? [Factor Research]
Thematic indices from MSCI have outperformed their benchmark since 2018 However, they have a rather unattractive factor mix Going against decades of research is not a sound investment strategy INTRODUCTION Although much of the future is uncertain, some technological innovations are rather certain.
- 4 weeks ago, 21 Apr 2022, 09:50pm -
Trend Following & Factor Investing - Unexpected Cousins? [Factor Research]
Trend following and beta-neutral factor investing are considered diversifying strategies However, since 2009 their correlations to stocks moved in tandem Both strategies had related performance drivers and risk exposures INTRODUCTION Asset classes seem easy to distinguish at first. For example,
- 1 month ago, 11 Apr 2022, 12:20pm -
Factor Olympics Q1 2022 [Factor Research]
Factor volatility was low despite the significant geopolitical and economic turmoil in Q1 2022 Value is the clear winner with double-digit gains Quality stocks underperformed, but only moderately INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10
- 1 month ago, 4 Apr 2022, 11:48pm -
Building a Diversified Portfolio for the Long-Term [Factor Research]
Most diversifying strategies fail to provide diversification benefits when most needed We build a diversified portfolio via trend, multi-factor, and long volatility An equal-weighted approach to asset allocation is not worse than more complex approaches INTRODUCTION At FactorResearch, we have
- 1 month ago, 28 Mar 2022, 08:44pm -
Risk-Managed Equity Exposure II [Factor Research]
Relying on single entry and exit signals for trading introduces model risk However, simple tactical asset allocation strategies are surprisingly robust Necessity of signal diversification is questionable INTRODUCTION Last week, we explored a simple risk management system for an equity allocation
- 1 month ago, 21 Mar 2022, 10:47am -
Risk-Managed Equity Exposure [Factor Research]
Risk management overlays tend to reduce stock market returns However, they also can reduce drawdowns and increase Sharpe ratios Given that diversification has become more difficult, these are becoming more relevant INTRODUCTION It is tough to have high return expectations for stocks for the coming
- 2 months ago, 14 Mar 2022, 11:43am -
Commodities vs Commodity ETFs [Factor Research]
The average correlation between oil and oil ETFs was only 0.8 Gold ETFs provide better exposure to gold than oil ETFs to oil Gold mining stocks are hybrids that feature gold and equity beta INTRODUCTION As the war in Russia unfolded, crude oil (WTI) breached $100 per barrel, which was last seen in
- 2 months ago, 7 Mar 2022, 09:55am -
Momentum in Emerging Markets [Factor Research]
Long-short momentum investing highlights attractive performance in Asia and emerging markets However, realized excess returns are significantly lower than theoretical ones Likely explained by transaction costs INTRODUCTION Momentum has been shown to generate attractive excess returns across eight
- 2 months ago, 28 Feb 2022, 08:23pm -
Smart Money, Crowd Intelligence, and AI [Factor Research]
Smart money, crowd intelligence, and AI ETFs have underperformed the S&P 500 since their inception Somewhat surprisingly, all three have almost the same factor exposures Negative exposure to value, and positive exposure to size and momentum factors INTRODUCTION Welcome to the qualifying round of
- 3 months ago, 8 Feb 2022, 09:50am -
Cryptocurrency Hedge Funds [Factor Research]
Cryptocurrency hedge funds generated abnormally high and uncorrelated returns since 2014 However, the returns can be simply attributed to the performance of Bitcoin Many crypto-beta ETFs & ETPs have been launched, so crypto hedge funds need to move from beta to alpha INTRODUCTION
- 3 months ago, 31 Jan 2022, 11:52am -
Myth-Busting: ETFs Are Eating the World [Factor Research]
ETFs are a negligible owner of US stocks Primary and secondary ETF trading has not grown quicker than total stock trading The impact of ETFs on stocks is less strong than frequently suggested INTRODUCTION “Software is eating the world.” The venture capitalist Marc Andreessen wrote these words
- 3 months ago, 24 Jan 2022, 09:55am -
Analyzing Floating Rate ETFs [Factor Research]
Floating rate ETFs pursue differentiated strategies Some of them are highly correlated to equities, limiting any diversification benefits The correlation with interest rates and inflation has been low INTRODUCTION Despite the consensus on high inflation being transitory in 2021, the five-year,
- 4 months ago, 18 Jan 2022, 01:23am -
Research Compendium 2021 [Factor Research]
“There is nothing new in the world except the history you do not know” – Harry S. Truman January 2022. Reading Time: Several hours. Author: FactorResearch. RESEARCH COMPENDIUM 2021 In 2021 we published more than 50 research notes on mostly quantitative strategies, but also on topics like
- 4 months ago, 10 Jan 2022, 12:03pm -
Factor Olympics Q4 2021 [Factor Research]
2021 was a year of moderate factor performance Value, Quality, and Low Volatility factors generated positive returns Momentum and Size were negative INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we only present factors
- 4 months ago, 4 Jan 2022, 11:03am -
ETFs for Rising Interest Rates [Factor Research]
A wide range of strategies are marketed as beneficiaries of rising interest rates Portfolios are comprised of equities, bonds, options, long as well as short positions However, only financial services companies and short bonds offer a positive correlation to interest rates INTRODUCTION In this year,
- 5 months ago, 13 Dec 2021, 09:36am -
Stock Market Returns and Volatility [Factor Research]
Average stock market returns are similar regardless if volatility was high or low However, given skewed returns, it was not attractive investing when volatility was high Unfortunately implementing a strategy to avoid high volatility periods is emotionally challenging INTRODUCTION Active fund
- 5 months ago, 7 Dec 2021, 10:11am -
Building a Long-Term Equity Portfolio [Factor Research]
With a long-term time horizon, investors should consider alternatives to the market-cap weighted equity indices A valuation-based approach for creating an equities portfolio may seem more sensible Using EBITDA / EV yield seems to avoid some of the quality issues of other value metrics INTRODUCTION
- 5 months ago, 29 Nov 2021, 09:50am -
Musing about S&P 500 Valuations [Factor Research]
The valuation of the S&P 500 depends on portfolio construction Analyst EPS projections are likely overly optimistic PEG ratios of other stock markets are more attractive INTRODUCTION Striking a bargain seems to bring joy to all people, regardless of their location and their beliefs. It is almost
- 5 months ago, 22 Nov 2021, 07:17pm -
Inflation-Themed ETFs: As Complicated as Inflation [Factor Research]
Given the importance of inflation as a topic, there are surprisingly few inflation-themed ETFs The few available pursue differentiated strategies that result in heterogeneous portfolios The correlation of these ETFs to inflation has been relatively low INTRODUCTION Creating an investment framework
- 6 months ago, 15 Nov 2021, 08:06pm -
The Mirage of Direct Indexing [Factor Research]
Direct indexing is one of the growth areas in the asset management industry However, direct indexing represents active management, specifically an inferior approach to it Given the poor track record of active management, most investors should avoid pursuing this INTRODUCTION Direct indexing is hot.
- 6 months ago, 8 Nov 2021, 10:05pm -
Short-Term Momentum in Stocks, Commodities, and Cryptos [Factor Research]
Developed markets have evolved from momentum to mean-reversion markets Other markets like EM or cryptos are momentum-dominated Likely explained by the distribution of retail vs institutional investors INTRODUCTION Markets evolve constantly, but they rarely change structurally. When they do, it is
- 6 months ago, 2 Nov 2021, 06:09am -
Does the Equity Market Lead the Currency Market? [Factor Research]
Past equity market returns seem to predict currency returns Such a currency timing strategy may be interesting as a diversifier However, it is difficult to rationalize the results INTRODUCTION Bloomberg TV at 08:30 am EST: “The S&P 500 futures are trading lower as the US Dollar depreciated
- 6 months ago, 25 Oct 2021, 11:58am -
Long Volatility Strategies: Hedge Funds vs DIY [Factor Research]
Long volatility exposure is typically achieved via hedge funds A simple DIY strategy would have generated similar attractive diversification benefits Most of the returns are explained by risk-off currencies, government bonds, and gold INTRODUCTION Do-it-yourself is the best and worst financial
- 7 months ago, 18 Oct 2021, 10:36am -
Less Efficient Markets = Higher Alpha? [Factor Research]
Emerging market mutual fund managers struggle to outperform EM hedge fund managers failed to generate meaningful alpha EM opportunities seem to come with proportional risks INTRODUCTION Students often ask me for career advice. It is not a particularly satisfying experience. On the one hand, these
- 7 months ago, 11 Oct 2021, 10:52am -
Factor Olympics Q3 2021 [Factor Research]
2021 is shaping up as a year of undifferentiated factor performance Value is the only factor with positive performance in year-to-date 2021 The Size factor has generated the most negative returns INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10
- 7 months ago, 4 Oct 2021, 11:10am -
This Time It’s Different!? [Factor Research]
Options trading has increased to record highs Some data points indicate changes in the market structure However, these changes are likely temporary rather than structural INTRODUCTION During the 1954 recession in the U.S., Sir John Templeton wrote to his clients that “this time it’s different”
- 7 months ago, 27 Sep 2021, 10:59am -
Are Stock Markets Becoming More Correlated? [Factor Research]
The correlation of stock markets has stopped increasing since the GFC The Value and Momentum factors are trading at peak correlations Correlations can change dramatically when using different data sources INTRODUCTION Globalization is less of a smooth ride on a river barge and more akin to river
- 7 months ago, 20 Sep 2021, 11:11am -
Equal vs Market Cap-Weighted Portfolios in Stock Market Crashes [Factor Research]
There is no consensus whether an equal or market cap-weighted allocation model for stocks is superior Both generated similar drawdowns during stock market crashes on average Theoretically, equal-weight is superior, but practically cap-weighted INTRODUCTION “Diversify, reduce fees, avoid active
- 8 months ago, 13 Sep 2021, 10:38am -
Building an Inflation Portfolio Using Asset Classes [Factor Research]
We recently explored using stocks to create an inflation-proxy portfolio that resulted in a collection of stocks with strong sector and factor biases. Specifically, the portfolio exhibited overweights in energy and financial stocks, perhaps as expected, as well as a long position in the value and
- 8 months ago, 30 Aug 2021, 10:51am -
Building a Long Volatility Strategy without Using Options [Factor Research]
Long volatility strategies can be built without using options Securities can be selected on different risk metrics like the VIX or high yield spread Although portfolios differ, the strategies exhibited similar trends INTRODUCTION We started our exploration of long volatility strategies by analyzing
- 8 months ago, 23 Aug 2021, 10:32pm -
Chinese Stocks from a Factor Lens [Factor Research]
Foreign stock ownership is low in China and the market is dominated by retail investors This provides an opportunity for investors to deploy quant strategies Factor investing has been far more attractive in Chinese than U.S. equities in recent years INTRODUCTION The latest chapter in the complicated
- 9 months ago, 16 Aug 2021, 10:43am -
Building an Inflation Portfolio Using Stocks [Factor Research]
An inflation portfolio can be created by systematically selecting stocks correlated to inflation This would have resulted in a portfolio with strong sector and factor biases However, the correlation to inflation would not have been significantly higher than for stocks overall INTRODUCTION Measuring
- 9 months ago, 9 Aug 2021, 10:09am -
Building a Long Volatility Strategy without Using Options [Factor Research]
Long volatility strategies can be built without using options Portfolios would have primarily consisted of certain currency pairs and treasury bonds They lack explosive returns when volatility spikes, but they also lack the bleed INTRODUCTION Almost all asset classes are implicitly short volatility
- 9 months ago, 2 Aug 2021, 01:58pm -
Digital Asset ETFs: Not Crypto Enough? [Factor Research]
Digital asset ETFs have outperformed tech stocks in recent years However, they provide no exposure to cryptocurrencies Their returns are explained by market beta and equity factors INTRODUCTION Cathie Wood, the founder and CEO of Ark Invest, an ETF manager, is the latest entrant to launching a
- 9 months ago, 26 Jul 2021, 10:18am -
Myth Busting: Equities are an Inflation Hedge [Factor Research]
Equities generated attractive nominal returns across all inflation regimes However, real returns were zero when inflation was above 10% Energy and materials performed best, consumer-facing sectors worst INTRODUCTION “I came of age and studied economics in the 1970s and I remember what that
- 10 months ago, 19 Jul 2021, 10:47am -
Building a Long Volatility Strategy without Using Options [Factor Research]
Long volatility strategies can be built without using options Our systematic approach has used exclusively currencies and bonds Investors can achieve attractive diversification benefits with such strategies INTRODUCTION The insurance policy is one of the game-changing products of our civilization as
- 10 months ago, 12 Jul 2021, 01:00pm -
Factor Olympics Q2 2021 [Factor Research]
The Q1 2021 factor rotation into Value and Size has reversed Value is the only factor with positive performance in 1H 2021 Momentum has generated the most negative returns INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. Specifically, we
- 10 months ago, 7 Jul 2021, 10:33am -
Factor Exposure Analysis: Exploring Residualization [Factor Research]
Regression analysis is frequently subject to multicollinearity Independent variables can be residualized Using residualized variables in a factor exposure analysis identifies different drivers DISCLAIMER “The worth of an econometrics textbook tends to be inversely related to the technical material
- 10 months ago, 28 Jun 2021, 11:24am -
Avoiding Disasters with Catastrophe Bonds? [Factor Research]
Catastrophe bonds offered exceptionally high risk-adjusted returns since 2005 These were uncorrelated to equities, making cat bonds attractive for diversification However, cat bonds might have underpriced risk historically, raising concerns going forward INTRODUCTION The global pandemic continues to
- 10 months ago, 21 Jun 2021, 11:47am -
Mid-Caps – The Hidden Champions? [Factor Research]
Mid-cap stocks are less popular than small or large caps In the US, they only outperformed in one out of 10 decades Globally, they have done better, creating a conundrum for investors INTRODUCTION A few weeks ago, David Stevenson, a well-known journalist and entrepreneur, asked me about my view on
- 11 months ago, 14 Jun 2021, 09:23am -
Liquid Alt Juggernauts: Worth their Salt? [Factor Research]
Liquid alternative mutual funds only captured 10% of the market share from hedge funds The alpha generated since 2013 was essentially zero Long-short equity funds can be replicated simply via market beta + cash INTRODUCTION One of the most perplexing questions in the investment industry is why
- 11 months ago, 7 Jun 2021, 08:40pm -
The Case against EM Equities [Factor Research]
EM equities are highly correlated to US stocks & high yield bonds, limiting diversification benefits They outperform primarily when the USD is depreciating, making it a currency play The largest MSCI EM index members will experience 50% population declines INTRODUCTION Seeing latex slowly
- 11 months ago, 2 Jun 2021, 03:14am -
Portfolio Construction in Venture Capital [Factor Research]
A few winners generate most of the venture capital returns Given this asymmetrical return distribution, portfolios should be constructed equally Missing the winners is simply too risky INTRODUCTION 2020 turned out to be a record year for the venture capital industry, despite the global pandemic.
- 11 months ago, 25 May 2021, 11:46am -
Managed Futures: Fast & Furious vs Slow & Steady [Factor Research]
Managed futures strategies aim to exploit short- or long-term trends Short-term trend followers are often seen as offering better stock market crash protection characteristics Our analysis highlights that the differences are marginal INTRODUCTION Aesop’s famous story of the race between the
- 1 year ago, 17 May 2021, 09:46am -
Improving the Odds of Value Investing [Factor Research]
The stock market volatility, skewness, and yield curve influence the performance of the value factor Investors require a certain market environment to buy troubled companies The key performance driver of the value factor is risk sentiment INTRODUCTION Ted Theodore first wrote about value versus
- 1 year ago, 10 May 2021, 10:57am -
60/40 Portfolios Without Bonds [Factor Research]
Bonds have become less useful in asset allocation given low to negative expected returns Liquid alternative strategies can be used to replace bonds From a historic perspective, long volatility strategies would have been especially attractive INTRODUCTION John Maynard Keynes famously asked, “when
- 1 year ago, 3 May 2021, 10:56am -
Factor Investing: The Truth Has Many Shades [Factor Research]
The data from Professor French has laid the foundation for factor investing However, over time factor portfolio construction grew complex and with many nuances Returns may look more or less attractive, which makes a weak foundation INTRODUCTION When I was growing up one of my favourite TV shows was
- 1 year ago, 26 Apr 2021, 08:55pm -
Myth-Busting: Money Printing Must Create Inflation [Factor Research]
The link between central bank policy, money supply, and inflation seems to have changed QE money printing had no substantial impact on inflation, aside from asset price inflation More direct stimuli might change that INTRODUCTION London ranks ninth on the UBS Global Real Estate Bubble index for
- 1 year ago, 19 Apr 2021, 11:11am -
Time Machines for Investors [Factor Research]
Investors are challenged when evaluating investment opportunities with limited track records Factor exposure analysis can be used to create replication portfolios These empower investors to walk backward and forward in time, enhancing the investment decision process INTRODUCTION Investing is all
- 1 year ago, 12 Apr 2021, 09:28pm -