Factor investing is likely the best option for investors seeking to outperform the market However, the cyclicality of factors makes factor investing challenging when it underperforms Investors that do not understand this cyclicality are likely better served by plain, rather than smart beta FREE

As AUM in merger arbitrage has increased, alpha decreased Investors can access merger arbitrage via hedge funds, bank indices, and ETFs The strategy is not as uncorrelated from equities as likely perceived by allocators INTRODUCTION Working in the restructuring team of a corporate finance boutique

Tail risk funds tend to be most in demand when they are least attractive Short-term bonds provided similar benefits to tail risk funds The TAIL ETF closely replicates the performance of tail risk funds INTRODUCTION In a year where the S&P 500 lost more than 30% in a few weeks, there are few

Factor investing in fixed income has been heralded as the next frontier in asset management Smart beta fixed income ETFs in the US manage only slightly more than $2 billion of assets Defensive strategies reduced drawdowns during the ongoing coronavirus crisis INTRODUCTION Investing is becoming more

Low Vol-Momentum & Value-Momentum portfolios outperformed stock markets since 1989 Low factor correlations contributed to the attractive risk-return profiles Excess returns have been lower in the most recent than in previous decades INTRODUCTION If an investor would state today that in ten or

We present the performance of five well-known factors on an annual basis for the last 10 years. We only present factors where academic research highlights positive excess returns across market cycles and asset classes. Other strategies like Growth might be widely-followed investment styles, but lack

The VIX has not remained at high levels for long in recent times, theoretically making a mean-reversion strategy attractive However, there were periods historically where volatility stayed elevated for years Furthermore, the VIX is not a tradeable index and related products should be viewed with

Thematic investing can be viewed as performance chasing with a narrative A systematic approach to thematic investing would have underperformed the stock market Thematic hedge fund managers have not generated attractive returns PERFORMANCE CHASING WITH A NARRATIVE? Thematic investing is like venture

Hard currency emerging market debt outperformed local currency EM debt since 2013 EM government and corporate debt traded comparably Adding EM debt to a traditional US equity-bond portfolio would have generated only marginal benefits INTRODUCTION Forecasting the short-term outlook for the S&P

ESG and Low Carbon portfolios feature significant, but different sector & country biases Investors should expect large tracking errors in some ETFs Some products contain stocks that are likely unexpected and undesired INTRODUCTION Investors seeking exposure to global equities with a low carbon

Venture capital returns are likely to be overstated Top-performing VC funds generated attractive returns, but are difficult to access Average venture capital returns can be replicated efficiently with public equities WINNERS & LOSERS The further the global financial crisis retreats into history,

Factors can be valued like stocks or markets The Low Volatility factor in the US had the best subsequent returns when cheapest and worst when most expensive However, the perspective is less clear when analyzing European and Japanese stock markets INTRODUCTION Funds flows are frequently analyzed by

Stock sentiment can be aggregated from public sources using a big data approach Results indicate that sentiment has some predictability for short-term factor performance Positive sentiment resulted in higher subsequent returns than negative sentiment INTRODUCTION Albert Einstein famously stated that

Most institutional investors can only trade the largest, most liquid stocks Introducing minimum liquidity requirements impacts factors differently Factor portfolio construction with liquidity constraints is especially challenging in small stock markets INTRODUCTION Index funds have breached $11

Private equity return data should be viewed with caution Returns are likely overstated while volatility is understated Private equity returns are highly correlated to public equities TWO MAGIC WORDS “This time is different” might be the four most dangerous words in investing. “Uncorrelated

Highly ranked ESG stocks trade at higher valuation multiples than the stock market However, the difference in multiples is minor and far less than extreme than for Growth stocks ESG ETFs generated lower returns than the stock market, but were also less volatile INTRODUCTION Europeans seem far more

The difference between the cheapest and most expensive smart beta ETF in the US is 59 bps on average Some smart beta ETFs offer negative factor exposure, which requires explanation Factor scores can be used to identify which smart beta ETFs offer the best ratio of factor exposure per dollar in fees

As in 2018, Low Volatility produced the best and Value the worst performance Value did not recover significantly further after a short rally in Q3 2019 However, Momentum broke its upward trajectory since then INTRODUCTION We present the performance of five well-known factors on an annual basis for

In 2019 we published more than 50 research notes on mostly factor investing and smart beta ETFs, but also on topics like ESG, activist investors, hedge fund replication, and artificial intelligence. The Research Compendium 2019 contains all of our research published this year. We would like to thank

The outlook for US equity and bond returns is low based on historical data The return assumptions of US public pension funds are difficult to achieve Only an extreme allocation to alternatives would meet the expected rate of return THE GLOBAL PENSION FUND CRISIS Tens of thousands of Dutch workers

Smart beta ETFs can be compared via a factor score, which relates fees to the factor exposure Value-focused ETFs in the US show a wide range of factor scores Large firms offer more attractive factor scores, but largely due to lower fees INTRODUCTION Beta is like ice cream and comes in many flavors.

ESG ETFs underperformed the stock market since 2005 Likely explained by higher fees, a constrained stock universe, and sector bets Financially-impaired investors like public pension funds and Millennials should avoid ESG investing INTRODUCTION If investors would be looking for the ETF flavor of the

Shareholder activism has not grown from a campaign or AUM perspective recently Activist funds have not generated attractive returns The lack of outperformance is challenging to explain INTRODUCTION Active fund managers today are like deer caught in the headlights of oncoming traffic as the

Bond indices are frequently portrayed as featuring a lower quality composition than equity indices Analysing equity and bond indices in the US and emerging markets confirms this view Perhaps this explains why there is some alpha generation in fixed income INTRODUCTION While almost all fund managers

Real estate stocks featured moderate correlations to stock markets over the last 30 years However, diversification benefits for equity portfolios were only marginal Other strategies provide similar yield and downside protection characteristics INTRODUCTION Surveys often reveal investor behaviour

The trends in factor performance are similar in emerging and developed markets Factor returns were higher in emerging than in developed markets However, higher transaction costs need to be considered carefully INTRODUCTION Capital markets of developed countries like the US are highly efficient and

Factor exposure analysis is essential for performance and risk contribution However, the results vary depending on methodologies, factor definitions, and other assumptions A holdings-based approach is preferable over regression analysis INTRODUCTION A large part of a capital allocator’s job is to

Equity income mutual funds have underperformed the S&P 500 since 1988 Especially on a post-tax basis Investors can create tax-efficient equity portfolios, but it does not represent a free lunch INTRODUCTION Warren Buffett is probably the most well-known and well-liked investor, which is easily

AI-focused companies have underperformed markets AI-powered ETFs have generated unimpressive returns In contrast, AI-powered hedge funds easily beat their benchmark, but the performance can be challenged INVESTING IN AI VERSUS AI INVESTING “AI will probably most likely lead to the end of the

Option-based strategies have similar characteristics to Low Volatility portfolios Combining these reduces idiosyncratic strategy risks The combinations feature higher risk-adjusted returns and lower drawdowns than the S&P 500 INTRODUCTION Some investment products and strategies can be considered

Most factors generated positive returns in Q1-3 2019 Low Volatility produced the best and Value the worst performance year-to-date The factor rotation from Momentum into Value in Q3 was short-lived INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10

Investment portfolios can be simplified by separating alpha from beta Alpha + beta portfolios offer higher risk-adjusted returns than smart beta The main hurdle for better portfolios is investor behaviour, not a lack of products INTRODUCTION In Buddhist teaching, the primary obstacles that prevent

The Low Volatility factor exhibited significant exposure to Value since 1989 The factors were highly correlated in the 1990s, but less after the financial crisis Quantitative easing was positive for Low Volatility, but negative for Value INTRODUCTION Riding the Ferris wheel in an amusement park is

Value investors earn a premium for holding undesirable stocks The yield curve may identify periods where the premium is more attractive Since 1971, the performance of the Value factor was negative when the yield curve was flattening INTRODUCTION Imagine a portfolio of companies that are plagued by

Investors can harvest returns from common equity factors on country level Returns are consistent when combined into a multi-factor portfolio Performance of some factors is comparable to those on single stock level, indicating common drivers INTRODUCTION Factor investing strategies like Value are

A classic long-short, multi-factor portfolio has lost close to 20% since 2018 The drawdown is within expectations, but the recovery period is abnormally long However, it’s difficult to argue for structural changes that make factor investing unattractive SEEKING DIVERSIFICATION THROUGH MULTI-FACTOR

The live performance of quant strategies is significantly worse than in backtesting Factor investing returns from research are frequently challenged as being overstated However, the performance of smart beta and long-short multi-factor funds match theoretical returns INTRODUCTION When pitching an

Given the popularity of Low Volatility, investors might expect structural shifts in the factor characteristics Betas, valuations, sector biases, interest rate sensitivity, and factor exposures are highly time-varying Although these are worth monitoring from a risk perspective, none seem particularly

Value and Size have a positive relationship with the PMI, similar to the S&P 500 Indicates that risk sentiment is a core driver of factor performance Investors can consider incorporating variables like the PMI in a risk management framework INTRODUCTION A physicist, a chemist, and an economist

The ESG factor generated positive returns since 2011 Strong sector biases (long tech & short discretionary) explain the performance Residual returns from ESG investing are essentially zero INTRODUCTION Investing is complicated as it is simple and complex at the same time. Common advice for new

Equal and fundamentally weighted equity indices outperformed market cap weighted in the US since 1990 The higher returns are explained by exposure to Value and Size factors The outperformance is not consistent across time given factor cyclicality THE RISE OF INDICES There are now more than 3.7

Most factors generated positive returns in 1H 2019 Low Volatility produced the best and Value the worst performance Factor performance is comparable in the US & Europe, but markedly different in Japan INTRODUCTION We present the performance of five well-known factors on an annual basis for the

There is consistency in the performance of the Value factor across markets and asset classes Allows to create a coherent framework of how to think about Value Suggests a global driver of factor performance INTRODUCTION Our research aims to educate investors by bridging the gap between academic

Investors can access alternative strategies via mutual funds and ETFs Most of these show moderate to high correlations to equities, which is concerning Bonds would have been a better diversifier in recent years INTRODUCTION Investing is challenging as it is complex and complicated, which requires

The performance of the Size factor in the US was positive since 1926, but not particularly attractive Returns in Europe were more favorable, but not in Japan Alternative metrics to market capitalization would not have resulted in better performance SMALL VERSUS LARGE STOCKS In the David vs. Goliath

This research note was originally published in the Beyond Beta magazine from ETF Stream. Here is the link. SUMMARY Single factor excess returns are attractive over the long-term, less in the short-term Comparing popular asset allocation models does not highlight one superior methodology Multi-factor

A global value portfolio on country level features structural country biases Returns were positive since 1990, but lacked consistency Value on country and single stock level exhibit the same trends, highlighting common performance drivers INTRODUCTION Holding Value stocks is emotionally challenging

The performance of the Momentum factor in the US has been poor since 2000 Fundamental valuation spreads were ineffective for improving the performance Combinations with other factors and factor volatility filters would have yielded better results INTRODUCTION John H. Cochrane of the Hoover

Core hedge fund strategies are available as low-cost and transparent ETFs The performance of hedge fund ETFs has been comparable to that of their benchmarks ETFs have only captured 1% of hedge fund assets INTRODUCTION As Amazon has been decimating large parts of the retail industry over the last two

Option-based strategies generated better risk-adjusted returns than the S&P 500 over the last 30 years Investors should be wary of buying options and focus on harvesting the volatility risk premium by writing options Option-based strategies are an interesting alternative to long-short equity