Quant Mashup - Factor Research
How Much Can You Lose with Bonds? [Factor Research]
Bonds are typically considered safe investments However, there were decades of negative real returns Drawdowns reached 50% for U.S. Treasuries and Bonds INTRODUCTION Inflation greater than 10% was unknown for the majority of people in developed markets before this year, but it is nothing
- 2 years ago, 27 Sep 2022, 01:45am -
Inflation-Linked Bonds for Inflationary Periods? [Factor Research]
Inflation-linked bonds are considered inflation-hedges However, these have lost almost as much as plain-vanilla bonds in 2022 The sensitivity to interest rates matters more than that to inflation INTRODUCTION Inflation is the biggest issue facing the U.S. and is more important to citizens than
- 2 years ago, 25 Sep 2022, 10:18pm -
Sector vs Factor-based Benchmark Selection [Factor Research]
Manager-selected benchmarks are suboptimal as they are not free of conflict of interests Investors can use sectors to identify more appropriate benchmarks However, this ignores factors, which are better at explaining investment returns INTRODUCTION In our last research article (Mirror, Mirror on the
- 2 years ago, 25 Sep 2022, 10:17pm -
Mirror, Mirror on the Wall, Which is the Fairest Benchmark of Them All? [Factor Research]
Evaluating manager performance is difficult as it requires an appropriate benchmark The manager’s benchmark selection is often not objective given conflicts of interests Factor exposure analysis can be used to systematically identify the best benchmark INTRODUCTION Although information asymmetries
- 2 years ago, 8 Sep 2022, 10:00am -
What’s wrong with Inverse ETFs? [Factor Research]
Inverse ETFs come with significant risk disclosure Analyzing the performance of these products justifies the warnings There is a significant difference between performance of inverse ETFs & the inverse underlying indices INTRODUCTION In May 2022, Allianz, the large German insurance company,
- 2 years ago, 29 Aug 2022, 10:03am -
Long Volatility versus Tactical Asset Allocation [Factor Research]
Long volatility strategies are attractive diversifiers, but complex and not easily accessible Tactical asset allocation for equities may be considered as an alternative There is no clear winner between these two options INTRODUCTION Risk management in portfolio construction is primarily achieved via
- 2 years ago, 23 Aug 2022, 09:56pm -
Outperformance Ain’t Alpha [Factor Research]
Outperformance and alpha are not the same One is the difference from a benchmark, the other is the unexplained return A contribution analysis helps understanding the return drivers INTRODUCTION Almost 90% of US drivers rate themselves safer and more skillful than average. Obviously, such perceptions
- 2 years ago, 16 Aug 2022, 10:14am -
Revisiting the Performance of TAA ETFs [Factor Research]
There has been a boom in launching tactical asset allocation ETFs However, the recent track record of these has been poor Declining stock and bond markets have created a challenging environment for these INTRODUCTION Most investment strategies become popular through short rather than long periods,
- 2 years ago, 10 Aug 2022, 10:21am -
Evaluating Inflation Hedges [Factor Research]
Despite being different metrics, CPI and breakeven inflation rates exhibited the same trends since 2003 The securities with high betas to inflation come from diverse sectors, not just from energy and commodities Portfolios often feature hidden inflation exposure that should be revealed via factor
- 2 years ago, 18 Jul 2022, 11:39pm -
Crypto Tokens: Does Security Selection Matter? [Factor Research]
More than 80% of cryptocurrency tokens trade below their first trading price Tokens are diverse in their functions, but all types have been losing money consistently Token financing seems to be more beneficial for the issuer than investors INTRODUCTION A falling stock market is not bad for everyone.
- 2 years ago, 11 Jul 2022, 09:39pm -
Factor Olympics Q2 2022 [Factor Research]
Value is the clear winner of YTD 2022 Value, Momentum, and Low Volatility factors were positively correlated, which changed to previous years The Quality factor performed worst, which can be explained by a bias towards tech stocks INTRODUCTION We present the performance of five well-known factors on
- 2 years ago, 5 Jul 2022, 11:12am -
Defensive & Diversifying Strategies in YTD 2022 [Factor Research]
Most defensive and diversifying strategies generated negative returns in YTD 2022 The correlation of almost all of these strategies to equities was too high Only managed futures generated attractive diversification benefits INTRODUCTION Economics and investing are all about data, eg GDP has
- 2 years ago, 27 Jun 2022, 10:57am -
Macro Variables in Factor Exposure Analysis [Factor Research]
Most investors treat factor and macro variables differently Including macro variables improves a factor exposure analysis Both should be considered simultaneously when analyzing investment portfolios INTRODUCTION The investment world is full of conundrums. For example, discussions on investment
- 2 years ago, 21 Jun 2022, 09:37pm -
Sector versus Factor Exposure Analysis [Factor Research]
Investors tend to talk more about sector than factor performance However, few investors conduct a regression-based sector exposure analysis The high correlations of sectors, even if structured market-neutral, makes this less meaningful INTRODUCTION Switch on CNBC or Bloomberg TV during US stock
- 2 years ago, 13 Jun 2022, 10:51am -
Factor Exposure Analysis of Fixed Income ETFs [Factor Research]
Factor exposure analysis can be used in fixed income as easily as in equities More variables improve the explanatory power of the model However, it also can make the interpretation challenging INTRODUCTION Running a factor exposure analysis is a core element of the due diligence process for
- 2 years ago, 7 Jun 2022, 11:34am -
Biotech Stocks: High Idiosyncratic Risks, High Alpha? [Factor Research]
Most technological change today is an evolution rather than a revolution. Naturally, it is great to have a mobile device that allows instant access to the global knowledge depository, entertainment, shopping, and so on, but most of these innovations have been predicted decades ago by science fiction
- 2 years ago, 30 May 2022, 10:54am -
Risk Parity & Rising Rates [Factor Research]
Risk parity strategies have become available via mutual funds and ETFs, but portfolio construction varies Rising interest rates are seen as a threat and recent performance was disappointing However, rising correlations between stocks and bonds would be more concerning INTRODUCTION Risk parity has
- 2 years ago, 24 May 2022, 10:16am -
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
- 2 years 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.
- 2 years 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,
- 2 years 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
- 2 years 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
- 2 years 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
- 2 years 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 years 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 years 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 years 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
- 2 years 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
- 2 years 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
- 2 years 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,
- 2 years 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
- 2 years 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
- 2 years 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,
- 2 years 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
- 2 years 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
- 2 years 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
- 2 years 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
- 2 years 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.
- 2 years 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
- 2 years 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
- 2 years 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
- 2 years 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
- 3 years 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
- 3 years 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”
- 3 years 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
- 3 years 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
- 3 years 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
- 3 years 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
- 3 years 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
- 3 years 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
- 3 years ago, 9 Aug 2021, 10:09am -