Trade optimization is more technical topic than we usually cover in our published research. Therefore, this note will relies heavily on mathematical notation and assumes readers have a basic understanding of optimization. Accompanying the commentary is code written in Python, meant to provide

We compare and contrast different approaches to risk managing equity exposure; including fixed income, risk parity, managed futures, tactical equity, and options-based strategies; over the last 20 years. We find that all eight strategies studied successfully reduce risk, while six of the eight

As more thematic products come to the market, it can be difficult for investors to decide how to allocate to them, even if they believe in their future potential. The sector disruptors are a suite of products that focus on areas of the economy that are heavily influenced by new technologies. Taking

This post is the first of a series where we will be providing some of our own thoughts and commentary the conversations we had in the first season of our new podcast. This post covers our conversation with Meb Faber, which you can listen to here. 2:09 - Meb hijacks the show to ask a very important

In July 2016, we argued that bond investors should be quick to celebrate the strong returns they had realized year-to-date. The combination of a defined maturity and known coupon rate creates a gravitational pull for bond returns. Using a global bond ETF universe, we develop a simple model to

We prefer to think about diversification in a three-dimensional framework: what, how, and when. The “how” axis covers the process with which an investment decision is made. There are a number of models that trend-followers might use to capture a trend. For example, trend-followers might employ a

Portfolio optimization research can be challenging due to the plethora of factors that can influence results, making it hard to generalize results outside of the specific cases tested. That being said, building a robust portfolio optimization engine requires a diligent focus on estimation risk.

This post covers our conversation with Tobias Carlisle, which you can listen to here. 2:09 - Toby starts at the beginning: with school classes that included sheering sheep in Australia. Corey Hoffstein ("CH"): I was so taken aback by this introduction that I was totally caught off-guard. I

In HIMCO’s May 2018 Quantitative Insight, they publish a figure that suggests the optimal holding length of a momentum strategy is a function of the formation period. Specifically, the result suggests that the optimal holding period is one selected such that the formation period plus the holding

This post is the first of a series where we will be providing some of our own thoughts and commentary the conversations we had in the first season of our new podcast. This post covers our conversation with Adam Butler, which you can listen to here. 1:57 - Corey introduces Adam via a blog post Adam

With the end of another quarter, the time of performance commentaries is upon us. We generally find most performance commentaries to be devoid of much substance, taking a “heads I’m skilled, tails I’m unlucky” mentality to describing short-term results. While quants may be reluctant to offer

In practice, investors and institutions alike have spending patterns that makes the sequence of market returns a relevant risk factor. All else held equal, investors would prefer to make contributions before large returns and withdrawals before large declines. For retirees making constant

It's finally here: the first season of the Flirting with Models podcast, the show that aims to pull back the curtain and meet the people who design, develop, and manage quantitative investment strategies. This season – titled Boutiques & Bloggers – is a series of conversations with

In order for active management to outperform passive investing, a manager needs both skill and opportunity. Opportunities can come in the form of entering and exiting the market, security selection, and portfolio construction. However, even if these opportunities can be quantified, developing a

Buffett’s alpha over the past 38 years has been an astounding 10% annualized, making him a prime example of investment discipline and skill. Through a statistical lens, the probability of having a track record this solid is extremely small. However, given enough investors mimicking Buffett’s

Value investing continues to experience a trough of sorrow. In particular, the traditional price-to-book factor has failed to establish new highs since December 2006 and sits in a 25% drawdown. While price-to-book has been the academic measure of choice for 25+ years, many practitioners have begun

Seasonality is an effect that shows up in data but is difficult to justify from a theoretical perspective using behavioral, risk-based, or structural reasoning. However, diving deeper into the effect within the U.S. sectors, we find that seasonality has been economically significant and surprisingly

The choice to lump sum invest (“LSI”) or dollar-cost average (“DCA”) is one fraught with emotion. Intuition tells us that LSI likely offers the best bet for long-term investors as markets, in general, tend to go up. However, can signals derived from simple trend models offer an edge? We find

Portfolio construction is a lot like cooking. There are two equally important elements: the ingredients and the recipe. The ingredients are the signals that are used to select investments. The recipe is the set of rules used to transform those signals into portfolio allocations. In factor investing,

Benchmarking a trend-following strategy can be a difficult exercise in managing behavioral biases. While the natural tendency is often to benchmark equity trend-following to all-equities (e.g. the S&P 500), this does not accurately give the strategy credit for choosing to be invested when the

We typically discuss trend following in the context of risk management for investors looking to diversify their diversifiers. While we believe that trend following is most appropriate for investors concerned about sequence risk, levered trend following may have use for investors pursuing growth. In

Diversification is a key ingredient to a successful trend following program. While most popular trend following programs take a multi-asset approach (e.g. managed futures programs), we believe that single-asset strategies can play a meaningful role in investor portfolios. We believe that long-term

While investors are often concerned about catastrophic risks, failing to allocate enough to risky assets can lead investors to “fail slowly” by not maintaining pace with inflation or supporting withdrawal rates. Historically, bonds have acted as the primary means of managing risk.However,

Benchmarks can be a very difficult subject to pin down. Choosing different ones can create drastically different backdrops to frame both short and long-term results. This was even true in our 2018 March Madness Bracket Challenge, with the value-weighted benchmark taking the top place. As investors,

For most investors, long-term “failure” means not meeting one’s financial objectives. In the portfolio management context, failure comes in two flavors. “Slow” failure results from taking too little risk, while “fast” failure results from taking too much risk. In his book, Red Blooded

Naïve and simple long/flat trend following approaches have demonstrated considerable consistency and success in U.S. equities. While there are many benefits to simplicity, an overly simplistic implementation can leave investors naked to unintended risks in the short run. We explore how investors

We outlined the full set of rules for the Newfound 2018 March Madness Brackets here. After two more rounds, we are down to the Final Four in our Newfound 2018 March Madness Bracket Challenge, and while the right hand side of the bracket looks predictable with two number 1 seeds facing off (Kansas

Trend following is an investment strategy that buys assets exhibiting strong absolute performance and sells assets exhibiting negative absolute performance. Despite its simplistic description, trend following has exhibited considerable empirical robustness as a strategy, having been found to work in

A momentum-based investing approach can be confusing to investors who are often told that “chasing performance” is a massive mistake and “timing the market” is impossible. Yet as a systematized strategy, momentum sits upon nearly a quarter century of positive academic evidence and a century

We outlined the full set of rules for the Newfound 2018 March Madness Brackets here. We have two rounds in the bag in this year’s March Madness bracket competition, and what a wild ride it’s been: 16 seed UMBC made history by beating 1 seed Virginia, edging them out by a mere 20 points… The

Even when an investment has a positive expected average growth rate, the experience of most individuals may be catastrophic. By focusing on the compound average growth rate, we can see the median realizations – which account for risk – are often more crucial decision points than ensemble

Bracket templates can be downloaded here. Bracket submissions must be sent here with a subject of "March Madness 2018" by 11:59PM Eastern time on Wednesday March 14, 2018. On the heels of ReSolve’s past four years of progressive March Madness bracket challenges, we are pleased to take

Over the past few years, ReSolve Asset Management has progressively worked to develop new and exciting rules for the March Madness bracket tournament. While the stakes may be much lower than in investing, many of the lessons we have learned translate well to portfolio construction and strategy

Few investors hold explicit shorts in their portfolio, but all active investors hold them We (re-)introduce the simple framework of thinking about an active portfolio as a combination of a passive benchmark plus a long/short portfolio. This decomposition provides greater clarity into the often

After 2008, tactical ETF strategies rose in popularity. We often come across advisors who self-implement their own tactical strategies, using simple measures of momentum and trend. We believe that thoughtful implementation of tactical strategies requires admission that tactical choices will be wrong

Dollar-cost averaging (DCA) versus lump sum investing (LSI) is often a difficult decision fraught with emotion. The historical and theoretical evidence contradicts the notion that DCA leads to better results from a return perspective, and only some measures of risk point to benefits in DCA. Rather

We believe that capital efficiency should remain a paramount objective for investors. The prudent use of leverage can help investors employ more risk efficient portfolios without necessarily sacrificing potential returns. Many investors, however, do not have access to leverage (be it via borrowing

Bond timing has been difficult for the past 35 years as interest rates have declined, especially since bonds started the period with high coupons. With low current rates and higher durations, the stage may be set for systematic, factor-based bond investing. Strategies such as value, momentum, and

When two managers implement identical strategies, but merely choose to rebalance on different days, we call variance between their returns “timing luck.” Timing luck can easily be overcome by using a method of overlapping portfolios, but few firms do this in practice. We believe the magnitude of

Factor investing seeks to balance specificity with generality: specific enough to have meaning, but general enough to be applied broadly. Diversification is a key tool to managing risk in factor portfolios. Imprecision in the factor definitions means that unintended bets are necessarily introduced.

We believe that capital efficiency should remain a paramount objective for investors. The prudent use of leverage can help investors employ more risk efficient portfolios without necessarily sacrificing potential returns. Many investors, however, do not have access to leverage (be it via borrowing

In statistics, the null hypothesis is the default statement that you test with data. From this test, you can either reject the null hypothesis in support of an alternative or assert that there is not enough evidence to believe anything other than the null hypothesis with a certain degree of

Traditional value strategies simply sort the investment universe based on one or more valuation metrics (e.g. book-to-market, price-to-earnings, etc.) and purchase the securities that look the cheapest. However, this process is often prone to structural sector bets, which are uncompensated sources

Most institutions are forecasting lower expected returns for traditional asset classes compared to historical realized levels. Rules based upon historically realized numbers – like the 4% withdrawal rule – may fail going forward. Should we simply accept lower withdrawal rates in our financial

Traditionally, investors have used a balance between stocks and bonds to govern their asset allocation. Expanding this palette to include other asset classes can allow them to potentially both enhance return and reduce risk, benefiting from diversification. Modern portfolio theory tells us, however,

Using historical data from the options market along with realized subsequent returns, we can translate risk-neutral probabilities into real-world probabilities. Market implied probabilities are risk-neutral probabilities derived from the derivatives market. They incorporate both the probability of

Risk parity portfolios attempt to diversify across asset classes and strategies by risk contribution as opposed to dollar allocation. Implementing a risk parity strategy requires making a number of important construction decisions. A key question we have to answer is “How are we going to measure

We’ve read a number of outlooks and commentaries lately from firms arguing for investors to take a tactical tilt away from U.S. equities and towards International equities. The logic behind this tilt is largely driven by relative valuations: international equities appear significantly cheaper than