Quant Mashup - Factor Research Equity Factors & The Mighty US Dollar [Factor Research]The US dollar had a slightly negative relationship with the stock market since 1996 Some equity factors are more sensitive to changes in the US dollar than others On average the sensitivity is zero, but as often averages are misleading INTRODUCTION The Economist’s Big Mac Index measures if(...) Replicating Famous Hedge Funds [Factor Research]Diverse hedge fund strategies can be replicated via factor-mimicking portfolios The analysis highlights that most returns are explained by factors, not alpha However, hedge funds can create value by harvesting factor returns efficiently via portfolio construction INTRODUCTION In 1973, the U.S. Food(...) Warren Buffet: The Greatest Factor Investor of All Time? [Factor Research]A factor exposure of Berkshire Hathaway reveals structural factor tilts Long Value, Size, Quality, and Low Volatility factors and short Growth and Dividend Yield Warren Buffet generated little alpha, but is highly skilled at harvesting factor returns SAINTS AND STAR INVESTORS The Vatican waits at(...) Multi-Factor Smart Beta ETFs [Factor Research]Investors have leaned towards multi-factor over single-factor products in recent years The factor selection and portfolio construction of multi-factor ETFs can be challenged Multi-factor ETFs often feature factors, such as growth, which are not supported by academic research while lacking exposure(...) Factor Olympics Q1 2019 [Factor Research]2019 has started favorable for factor investors, compared to 2018 Low Volatility generated the best and Value the worst performance Factor performance is comparable in the US & Europe, but different in Japan INTRODUCTION We present the performance of five well-known factors on an annual basis(...) Black Swans, Major Events and Factor Returns [Factor Research]It is questionable if investors should prepare for catastrophic events Factor returns are almost random after black swan and major events Simple diversification is likely the best option for the expected and unexpected INTRODUCTION Investors fear black swan events, although it can be argued that(...) Smart Beta Asset Allocation Models [Factor Research]Most smart beta strategies outperformed the market since 1990, but few have in recent years Diversifying across strategies mitigates the risk of underperformance Various asset allocation models for creating multi-factor portfolios highlight similar results INTRODUCTION The appearance of smart beta(...) GARP Investing: Golden or Garbage? [Factor Research]GARP aims to combine Growth and Value investing GARP stocks have outperformed the market since 1989 It is somewhat perplexing how well the strategy worked VALUE VERSUS GROWTH With their thousands of employees, suites of products, international reach, and legendary histories, General Electric (GE)(...) Benchmarking Smart Beta ETFs [Factor Research]Long-only factor portfolios can be used for benchmarking smart beta ETFs Results highlight minor tracking errors Likely explained by relatively homogenous factor definitions by ETF issuers INTRODUCTION Investment professionals are not known for their creativity, but that is perhaps only because(...) Minimum Variance Versus Low Volatility [Factor Research]The largest smart beta Low Volatility ETF is technically a Minimum Variance strategy Low Volatility and Minimum Variance have comparable and attractive characteristics However, both currently feature a high sensitivity to interest rates INTRODUCTION The Low Volatility factor was the best performing(...) Factor Investing in Financials, Real Estate & MLPs [Factor Research]Beating benchmarks is challenging for fund managers, even in unique sectors Factor performance in financials, REITs, and MLPs is comparable to the cross-sector factor returns Classic factor investing strategies are likely more attractive than industry expertise INTRODUCTION Stating that active(...) Smart Beta: Broken By Design? [Factor Research]SUMMARY Smart beta excess returns are different from factor returns The Low Volatility factor shows the highest discrepancy between theoretical and realized returns Investors might be better served by embracing long-short factor products REALITY DYSFUNCTION Steve Jobs’s “reality distortion(...) Value, Momentum and Carry Across Asset Classes [Factor Research]Cross-asset multi-factor exposure might be an attractive diversifier for an equity portfolio Factors share trends across asset classes, indicating common drivers However, relationships are time-varying, increasing complexity and risks INTRODUCTION There is a 72% probability of the San Franciso Bay(...) Corporate Debt In The Chinese Stock Market [Factor Research]China exhibits the world’s highest corporate debt as % of GDP However, Chinese stocks are not significantly more levered than U.S. stocks Asset and debt growth has stalled in 2018, likely indicating an economic slowdown INTRODUCTION The McKinsey Global Institute published an influential study in(...) ESG Investing: Too Good To Be True? [Factor Research]ESG factors generated positive excess returns since 2009 Show positive exposure to Low Volatility & Quality and negative exposure to Value & Size Factor exposure is likely structural and not temporary INTRODUCTION BlackRock is aggressively launching products with high environmental, social,(...) An Anatomy of Smart Beta Value ETFs [Factor Research]Smart beta Value ETFs are relatively homogenous Some show high exposures to other equity factors, which may represent risk Excess returns from smart beta are significantly lower than long-short factor returns INTRODUCTION The last ten years can be viewed as a lost decade for Value investors as(...) Factor Olympics 2018 [Factor Research]2018 was negative for classic multi-factor portfolios Low Volatility generated the best and Value the worst performance Factor performance was homogenous across global markets INTRODUCTION We present the performance of five well-known factors on an annual basis for the last 10 years, including 2018.(...) Research Compendium 2018 [Factor Research]In 2018 we published more than 50 research notes and 4 white papers on mainly factor investing, but also on other topics like zombie stocks, replicating private equity returns, statistical arbitrage, and mutual fund performance chasing. We would like to thank you for reading and always appreciate(...) Factor Investing Made In China [Factor Research]This research note was originally published by the CAIA Association’s AllAboutAlpha blog. Here is the link. SUMMARY Common equity factors generated attractive risk-adjusted returns in the Chinese stock market Factor performance in China often mirrors global factor performance Indicates common(...) Factor Optimisation [Factor Research]Equity factors exhibit sector biases and exposures to other common factors A factor optimisation process allows investors to create pure factors Risk-adjusted returns do not increase, but pure factors are attractive from analytical, risk and allocation perspectives INTRODUCTION When large quantities(...) Private Equity: The Emperor Has No Clothes [Factor Research]This research note was originally published by the CFA Institute’s Enterprising Investor blog. Here is the link. SUMMARY Private equity returns can be replicated with small cap equities Small, cheap and levered stocks would have achieved higher returns since 1988 Valuation and debt multiples are(...) Tactical Statistical Arbitrage [Factor Research]SUMMARY Statistical arbitrage behaves similarly across markets Volatility is the main performance driver Attractive strategy for diversifying an equity portfolio INTRODUCTION Strategies like Value or Momentum are like staples that deserve a permanent allocation in investors portfolios. In contrast,(...) The Rise of Zombie Stocks [Factor Research]This research note was originally published by the CAIA Association’s AllAboutAlpha blog. Here is the link. SUMMARY Zombie firms, where interest payments exceed operating profits, are on the rise Zombie stocks perform surprisingly well They are expensive, volatile stocks from diverse sectors(...) Equity Factors: Reducing Portfolio Turnover [Factor Research]Portfolio turnover of equity factors can be reduced significantly by trading more conservatively However, reducing turnover does not necessarily increase risk-return ratios It all depends on transaction costs INTRODUCTION Turnover in business tends to be positive or negative, depending on the(...) The Odd Factors: Profitability and Investment [Factor Research]The Profitability factor generated attractive returns in the US and Europe since 1990 It is difficult to explain why investors should be compensated for holding highly profitable companies The Investment factor was less attractive and is unusual from a financial analyst’s perspective INTRODUCTION(...) The Dark Side of Low-Volatility Stocks [Factor Research]This research note was originally published by the CFA Institute’s Enterprising Investor blog. Here is the link. SUMMARY Low-volatility stocks have outperformed the market over the last 25 years The strategy has reduced equity drawdowns in the US, Europe, and Japan significantly However,(...) Statistical Arbitrage in the US [Factor Research]Statistical arbitrage has attractive strategy characteristics However, the returns are highly dependent on transaction costs Best used as a tactical strategy when volatility is high INTRODUCTION Equity markets in 2018 can be characterized by divergence. There is the US, showing strong returns,(...) Improving the Odds of Value [Factor Research]Value investors earn a premium for holding undesirable stocks Market skewness may identify periods where the premium is more attractive The returns from the Value factor since 1926 were zero when market skewness was negative INTRODUCTION Although buying cheap stocks is intuitively appealing, holding(...) Factor Investing in Micro & Small Caps [Factor Research]This research note was originally published by the CFA Institute’s Enterprising Investor blog. Here is the link. SUMMARY Micro caps are commonly perceived as highly risky, but potentially also highly rewarding Smalls caps generate more attractive risk-return ratios than micro caps on index level(...) Factor Olympics Q3 2018 [Factor Research]Global factor performance in the first three quarters of 2018 is comparable to 2017 However, regional factor performance diverges, reflecting changes in monetary and trade policies Low Volatility leads and Value lags INTRODUCTION We present the performance of seven well-known factors on an annual(...) Liquid Alternatives: Alternative Enough? [Factor Research]Liquid alternatives offer hedge fund strategies in mutual fund format The correlations to the S&P 500 have been high, even of market neutral funds Diversification benefits have therefore been limited DISRUPTING THE HEDGE FUND INDUSTRY Liquid alternatives have been heralded as hedge funds for(...) Short-Term Momentum in Equity Factors [Factor Research]Short-term momentum persists in common equity factors The persistence is strong in Value and Dividend Yield However, these results conflict with short-term mean-reversion on equity index level INTRODUCTION When Trump won the US presidential election in November 2016, small and cheap stocks started(...) Volatility, Dispersion & Correlation - Friends or Foes? [Factor Research]Higher volatility & dispersion imply higher stock market risks The relationship between correlation and risk is not linear However, these market technicals do not behave consistently across time INTRODUCTION Financial reporters frequently comment on stock market technicals like volatility and(...) Chasing Mutual Fund Performance [Factor Research]Mutual funds exhibit momentum when measured by their one-year performance Momentum disappears when more reasonable fund selection criteria are applied Performance does not seem effective for fund selection for a full market cycle CHASING PERFORMANCE Chasing mutual fund performance suffers from a bad(...) Factor Momentum [Factor Research]The Momentum strategy can be applied to stocks, sectors, countries and factors Factor momentum shows positive excess returns across regions However, single-stock Momentum performance is comparable and less complex to implement INTRODUCTION We recently investigated applying the long-short Momentum(...) Low Volatility, Low Beta & Low Correlation [Factor Research]The Low Volatility, Low Beta and Low Correlation factors are interrelated Low-risk factors generate attractive risk-adjusted returns, but require beta-neutrality Currently they feature moderate to high interest-rate sensitivity INTRODUCTION Coca-Cola versus Bitcoin Investment Trust, Mattel versus(...) Factor Exposure: Smart Beta ETFs vs Mutual Funds [Factor Research]Investors can express factor views via smart beta ETFs or mutual funds Some mutual funds offer higher factor exposure than smart beta ETFs Given higher fees, strong views on expected factor performance are required INTRODUCTION Similar to wind and water eroding the strongest mountains over time,(...) Momentum Variations [Factor Research]The simplicity of the Momentum factor can be intellectually challenging Various alternative Momentum versions highlight remarkable similar return profiles The robustness is an attractive characteristic of the investment strategy INTRODUCTION What do selfies, the Kardashians, Crocs, blue cheese, and(...) Factors: Shorting Stocks vs The Index [Factor Research]Most factor investing research is based on long-short stock portfolios Investible risk premia strategies often feature a short index position Trade-off between theoretical alpha and implementation costs & efficiency INTRODUCTION Amundi, a French asset manager, was the first institution to launch(...) ETFs, Smart Beta and Factor Exposure [Factor Research]Factor exposure analysis can be used to derive factor themes Smart beta ETFs offer relatively low factor exposure It is all about how factors are defined INTRODUCTION The Austrian energy drinks company Red Bull advertised for almost two decades that Red Bull “gives you wings” and improves a(...) Stock Portfolio Optimization [Factor Research]Portfolios frequently contain stocks representing duplicate factor risks or insignificant weights An optimisation process focused on factor exposure can increase the portfolio efficiency Increasing or decreasing factor exposure requires a view on expected factor performance and risks INTRODUCTION(...) Impact of Single Stocks On Factor Returns [Factor Research]Factor portfolios are typically created by equal weighting stocks The impact of single stocks is therefore reduced compared to market-cap weighted indices The FAANG stocks impacted factors differently INTRODUCTION The famous FAANG quintet of Facebook, Amazon, Apple, Netflix, and Google has driven(...) Factor Crowding Model [Factor Research]Crowded factors exhibit higher drawdowns than uncrowded factors A multi-metric approach can be successfully applied to measure factor crowding Effective in reducing factor drawdowns and volatility, but less meaningful for returns INTRODUCTION Architects devoted to creating large public facilities(...) Factor Olympics 1H 2018 [Factor Research]Factor performance in 1H 2018 is comparable to 2017 The Size factor has taken the lead, likely reflecting the threat of global trade wars Value has generated the most negative returns across regions INTRODUCTION We present the performance of seven well-known factors on an annual basis for the last(...) Measuring Factor Crowding via Valuations [Factor Research]The Value factor has generated flat returns over the last decade, which has been challenging for the most dedicated Value investors. Given that the average mutual fund holding period is three years, investors might question if the Value factor has become a contrarian call, which arguably makes it(...) Sector vs Country Momentum [Factor Research]The Momentum strategy can be applied to stocks, sectors and countries Sector and country Momentum portfolios generate positive excess returns However, cross sector & country and single stock Momentum portfolios generate higher risk-return ratios INTRODUCTION When a graduate joins the M&A(...) Skewness as a Factor [Factor Research]Skewness is a feature of stocks with high firm-risks Stocks with positive or negative skewness outperform the market Can partially be explained by the Size factor INTRODUCTION Many investors started their investment career at an early age, typically buying a stock that showed an enticing performance(...) Market Timing with Multiples, Momentum and Volatility [Factor Research]Equity multiples have been elevated in recent years Using valuation multiples for allocation decisions is a challenging strategy Momentum and volatility-based strategies are more attractive INTRODUCTION In recent years the stock market in the US has been expensive on a variety of valuation(...) Tactical Mean-Reversion [Factor Research]The Mean-Reversion factor is driven by volatility Allocating tactically when volatility is high generates an attractive payoff profile The strategy can be considered as a tail risk hedge for equity portfolios INTRODUCTION Our most recent research note focused on the Mean-Reversion factor (please see(...) Mean-Reversion Across Markets [Factor Research]Volatility spiked in the first quarter of 2018 when global stock markets declined, which was mainly due to concerns on proposed tariffs by the US government and rising interest rates. Since then markets recovered and volatility declined again, but higher interest rates are likely to have a negative(...)