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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

High equity valuations are frequently justified by low interest rates There is no long-term evidence in the US to support this theory P/E ratios in Japan and Europe have remained low, despite zero or negative yields INTRODUCTION One of the more peculiar transactions I worked on as an investment

Stock market returns were highly positive when the variance risk premium (VRP) was negative Returns were slightly negative across markets when the VRP was positive This relationship can not be exploited for market timing INTRODUCTION The US stock market in 1999 and 2020 had probably more

Quality and quality income ETFs have underperformed the S&P 500 since 2005 The most recent underperformance is explained by an underweight to technology stocks However, more importantly, quality ETFs have not reduced drawdowns during stock market crashes INTRODUCTION Investing is never easy, but

There are few alternatives to regression analysis when explaining investment performance Too few as well as too many independent variables can be problematic The results are often not intuitive, but also encourage asking further questions that may prove insightful INTRODUCTION The older I become,

Momentum has been the clear winner across markets in 2020 Value has been the laggard like in recent years Low Volatility ended a 10-year fantastic run INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years. We only present factors where academic

In 2020 we published more than 50 research notes on mostly factor investing and smart beta ETFs, but also on topics like ESG, tail risk hedge funds, long volatility strategies, and private equity. The Research Compendium 2020 contains all of our research published this year. We would like to thank

The rise of intangibles has been increasingly used as an argument for the poor performance of the value factor However, this idea is not supported by data The type of market environment is marginally more useful for explaining the value factor performance INTRODUCTION Great storytelling may be the

Given alternative data, machine learning, and AI advances, systematic should beat discretionary investing However, the performance of systematic and discretionary equity market neutral hedge funds has largely been the same since 2009 Both were also correlated to the stock market, offered low

Defined outcome ETFs have quickly gathered almost $5 billion in assets Not unexpected given their much lower drawdowns when the market crashed in March 2020 However, they are complex and expensive products and there are viable alternatives INTRODUCTION If ETFs had an arch enemy, then it probably

The long-term track record of equity market neutral hedge funds is attractive, but should be viewed with scepticism due to Madoff and survivorship bias Only one index from HFRX seems sound, but his highlights negative alpha since the GFC and positive returns primarily from market beta A factor

Zombie stocks are a diverse group, both from a country and sector perspective Zombie stocks were fundamentally riskier, yet outperformed non-zombie stocks over the last year Oddly, investors need to pay up as they are also more expensive INTRODUCTION Walking through financial centers like London or

Carry across asset classes has not performed strongly over the most recent decade Currency carry and Value & Size equity factors exhibited the same trends in performance since 1999 All three factors are likely driven by risk sentiment, essentially offering the same risk exposure INTRODUCTION

Linear regression is widely used for factor exposure analysis However, a high R2 and low p-value can be misleading Unsurprisingly the data quality matters INTRODUCTION Some fields of science like math or statistics seem to be too dry to be joking about, but a quick Google search for jokes on

Momentum & Quality are leading the performance scoreboard in Q1-3 2020 Value & Size generated negative returns, like in recent years, and Low Volatility ended a 10-year fantastic run 2020 is shaping up as a year of highly dispersed factor returns INTRODUCTION We present the performance of

The leverage of US stocks has been increasing over the last four decades The most leveraged stocks did not generate higher returns than the least leverages ones However, they were also not riskier INTRODUCTION The IMF issued a warning on corporate debt in their latest Global Stability Report and

There is a negative relationship between aging populations and stock valuations Given that most developed markets are aging, this creates structural headwinds for equities The massive future population declines require investors to rethink traditional asset allocation INTRODUCTION “The curious

Volatility hedge funds provided attractive diversification benefits for equity portfolios However, long were preferable over short volatility strategies Some scepticism is required for the hedge fund index performance INTRODUCTION In finance 101, there is usually little doubt on what constitutes the

There seems to be a relationship between the Profitability factor and interest rates The most profitable stocks outperformed the least profitable ones when market cap-weighted However, when equal-weighted, the least profitable stocks outperformed INTRODUCTION The gap between theory and reality in

The Value factor is often explained as representing a risk premium or a behavioral bias However, financial analysts regard cheap stocks as less risky than expensive ones Data shows that expensive stocks were riskier than cheap ones, which challenges the risk premium theory INTRODUCTION Which of the

Factor investing can be pursued across asset classes Risk premia products sold by investment banks have generated mostly unattractive returns since 2006 The idea of risk premia indices is great, but the implementation has been poor INTRODUCTION Monoculture can be considered the biggest threat to our

Singapore’s stock market has unique features given its strong sector biases However, despite these, there were no structural factor exposures over time Like in other markets, investors can pursue factor investing to generate outperformance INTRODUCTION One of the stories of how Singapore received

Most asset classes are bets on economic growth Diversified endowment-style portfolios are essentially short volatility Long volatility strategies can be used to create anti-fragile portfolios LONG OR SHORT VOLATILITY? In what by now seems like a galaxy far far away, I once worked as an equity

The alpha of global macro funds has been shrinking consistently over time However, correlations to equities & bonds were low on average, offering diversification benefits Capital allocators have been cautious on the strategy in recent years INTRODUCTION He-Man and the Masters of the Universe was

Some EM asset classes are highly correlated, to the point they can almost be considered interchangeable EM equities and hard-currency government debt are highly correlated to US equities and bonds In crisis times, all EM exposure is sold off and fails to provide meaningful diversification benefits

After strong momentum rallies, investors frequently ask if cap-weighted benchmarks are good Momentum bets Factor exposure analysis shows this is not the case Investors should seek smart beta and long-short products if they want Momentum exposure INTRODUCTION Old myths are hard to kill. Good old

Momentum & Quality are leading the performance scoreboard in 1H 2020 Value & Size generated negative returns, like in recent years Low Volatility failed to preserve capital during the COVID-19 crisis INTRODUCTION We present the performance of five well-known factors on an annual basis for

Harvesting the variance risk premium has a sound theoretical foundation However, actual investment products have generated poor returns Furthermore, they are correlated to equities, providing few diversification benefits INTRODUCTION Investing is akin to fighting in a never-ending war. There are

Bonds had superhero qualities over the last few decades The case for bonds in asset allocation is not clear when yields are low or negative Japan can be used as a roadmap for the outlook of a 60/40 portfolio in the US or Europe FIXED INCOME KRYPTONITE “Faster than a speeding bullet. More powerful

Defensive smart beta strategies like Low Volatility did not offer much capital protection in 2020 Long-short multi-factor investing generated negative returns, but still offered diversification benefits Managed futures finally found their redemption given positive & uncorrelated returns

The Low Volatility strategy failed to protect investors in March and April 2020 Industrials & materials generated positive and technology & real estate negative relative performance Low Vol strategies do not deliver ESG benefits INTRODUCTION Low volatility (Low Vol) strategies have gained

US bonds generated positive total returns in most inflation regimes Returns were mixed when inflation was above 4% Real returns were strongly negative when inflation was high INTRODUCTION Inflation is like cancer. It largely happens out of plain sight and requires focus to be noticed. The data is

Tactical investing aims to deliver better risk-adjusted returns and/or reduced drawdowns Tactical ETFs have not achieved either objective in recent years It is challenging to explain the consistent underperformance across different types of tactical ETFs INTRODUCTION Every investor is a tactician,

This research note was originally published at Alpha Architect. Here is the link. SUMMARY Factors can be valued like stocks Factor valuations have not changed structurally over the last 30 years Cheap factors outperformed expensive ones on average INTRODUCTION Tesla (TSLA) breached the $100 billion