The article addresses the estimation of capacity for an equity fund that forms portfolios based on a given investment strategy. It fits within three strands of literature: i) theoretical models of optimal trading or portfolio construction under alpha erosion and trade frictions; ii) empirical

The benefits of diversification are often touted, but many investors feel disappointed in diversified portfolios because of the dispersion in performance of the individual holdings. In the context of three different unconstrained sleeves, we look at a way to measure and visualize the benefit (or

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

Today I decided to look at SPX performance following past mid-term elections. I did not find much that suggested a strong edge. Below is a look at results since 1970 following mid-term elections. 2018-11-04-1 The numbers suggest perhaps a mild inclination for the market to “celebrate” the

We have mentioned it several times - we are quants but we love history and we love research papers like this: Author: McQuarrie Title: The First Eighty Years of the US Bond Market: Investor Total Return from 1793, Combining Federal, Municipal, and Corporate Bonds Link:

Real interest rates on ‘safe’ assets such as high-quality government bonds had been stationary around 2% for more than a century until the 1980s. Since then they have witnessed an unprecedented global decline, with most developed markets converging on the U.S. market trend. There is evidence

This week Ryan and I discuss two topics. First, we discuss a paper examining the performance of bank affiliated mutual funds. Second, we examine a post by Larry Swedroe on diversification. Paper Links: Do Bank Affiliated Funds Underperform Affiliated Funds? Asset Diversification in a Flat World.

This is a summary of the recent performance of a wide range of excellent tactical asset allocation strategies, net of transaction costs. These strategies are sourced from books, academic papers, and other publications. While we don’t (yet) include every published TAA model, these strategies are

Diversification is a fundamental principle of prudent investing due to its ability to mitigate/minimize risks. In fact, it has been called the only free lunch in investing because, done properly, it can reduce risk without reducing expected returns. This led to the conclusion that investors should

With the calendar moving from October to November, it has now entered its “Best 6 Months”. The “Best 6 Months” tendency was first published by Yale Hirsch, founder of the Stock Trader’s Almanac, in 1986. The concept behind the “Best 6 Months” is simple. Seasonality suggests that over

Journalists love to talk about bubbles. The Wall Street Journal has hinted at bubbles in both the Chinese stock market and the market for Bitcoin during the past month alone. But, financial economists are much more reluctant to call something a bubble. There’s debate about whether bubbles even

If all finance developers around the world were asked to choose the main nightmare they have to face on daily basis, I bet most of them would choose ‘overfitting’. Furthermore, imagine you have to develop an algorithm which has only one ‘ingredient’ to be modelled, only one time-series

Research suggests that simple heuristics are often far more robust than more complicated, theoretically optimal solutions. Taken too far, we believe simplicity can actually introduce significant fragility into an investment process. Using trend equity as an example, we demonstrate how using only a

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,

This morning I saw the chart on Ritholz.com of what happens when you miss the best X days of the market. I see a variation of this chart often and is used to argue why someone should not try and time the market. One concept I like to do is to invert. Meaning try the opposite idea and see what you

Variance term premia are surcharges on traded volatility that compensate for bearing volatility risk in respect to underlying asset prices over different forward horizons. The premia tend to increase in financial market distress and decrease in market expansions. Variance term premia have

You can watch the video via the link below: This week Ryan and Jack discuss several important topics. First, they discuss the tracking error associated with trend-following strategies. Second, they chat about a paper by researchers from Goldman Sachs, “Constructing Long-Only Multifactor

Bloomberg last week published an intriguing story about a new exchange traded fund (ETF) that uses artificial intelligence (AI) to outperform market indexes and active managers alike. The implication: a new era of AI-driven investing has dawned, putting the standard applications of indexing at a

A question I’ve received in the past is the following: If you could go back in time five years ago and tell yourself something about investing, what would it be? My response is the following: Tracking error. First, what is tracking error?(1) Tracking error is a measure of how much a strategy

As we approached the close I noted on Twitter (@QuantEdges) that the Quantifiable Edges Capitulative Breadth Index (CBI) was starting to spike. And the closer we got to 4pm EST, the higher it got. At the end of the day, the CBI finished at 10, which is a level I have long considered bullish. The

Smart Beta ETFs are achieving an increasing popularity, seen as the perfect equilibrium between passive investment and active management. But, what’s the difference between them and the traditional ones? Is it possible to create our own ETF with some previous experience and without assuming higher

Over the past 32 years, October has been the most volatile month on average for the S&P500 and December the least, in this article we will use simulation to assess the statistical significance of this observation and to what extent this observation could occur by chance. All code included! Our

In this commentary we attempt to identify the sources of performance in long/short equity strategies. Using Kalman Filtering, we attempt to replicate the Credit Suisse Long/Short Liquid Index with a set of common factors designed to capture equity beta, regional, and style tilts. We find that as a

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,

At long last, it’s here! MATH-TWS is a new Mathematica package that connects Wolfram Mathematica to the Interactive Brokers TWS platform via the C++ API. It enables the user to retrieve information from TWS on accounts, portfolios and positions, as well as historical and real-time market data.

The heightened interest in factor investing has been accompanied by a corresponding focus on the nuts and bolts of constructing multifactor portfolios. There are essentially two ways to go: In a one-step process, single factor signals are blended into a composite signal and one multifactor portfolio

As part of my recent research I have found it convenient to write another custom plotting function for Octave, which plots a single line price plot against a conditionally coloured background, e.g. two separate colours for bull and bear market regimes. Being able to plot like this avoids the

This week Ryan and I have a discussion on three topics. First, we discuss ETF tax efficiency based on the findings in a new paper by the RAFI team. Second, we discuss the profitability factor as Larry Swedroe highlights a new paper on international evidence. Third, we discuss my article on how one

One of the most asked questions when dealing with several features is how you can summarise or transform them to similar scales. As you probably know, many Machine Learning algorithms demand the input features being in similar scales. But, what if they aren’t? Can we just work with raw data in the

Robert Novy-Marx’s 2013 paper “The Other Side of Value: The Gross Profitability Premium” not only provided investors with new insights into the cross-section of stock returns, but also helped further explain some of Warren Buffett’s superior performance. (Wes Gray summarized that paper

I was recently at a NWTTA presentation about the “S&P 500 Dividend Aristocrats” and how to trade these stocks. The strategy was part quantitative and part discretionary. It was popular talk with lots of good questions. People always seem interested in dividend stocks but for me they are just

Close to 1,000 finance professionals registered to attend the event, an increase of nearly 50% from last year’s event. Surely, artificial intelligence and big data continues to grab the attention of the investment industry. The event took place on September 12, 2018 at the Convene Center by Times

“What is the correct benchmark for trend following?” This is a difficult question, and there really is no perfect answer. As many of our readers know, we are fans of trend following and trend-followed portfolios. For those unfamiliar with trend following, the idea is rather simple–invest in an

In 2013, I created my Global Equities Momentum (GEM) model that applied dual momentum to stock and bond indices. We hold U.S. or non-U.S. stock indices when stocks are strong. Bonds are a safe harbor when stocks are weak. When my book was published in 2014, I had Barclays bond index data back to

In this paper we discuss simple rules for timing exposure to 10-year U.S. Treasuries. We explore signals based upon the slope of the yield curve (“carry”), prior returns (“trend”), and prior equity returns (“hedge”). We implement long/short implementations of each strategy covering the

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

Just finished reading the paper Stock Market’s Price Movement Prediction With LSTM Neural Networks. The abstract attractively reads: “The results that were obtained are promising, getting up to an average of 55.9% of accuracy when predicting if the price of a particular stock is going to go up

Developer: Richard Wyckoff; Toby Crabel; Gerald Appel. Source: Crabel, T. (1990). Day Trading with Short Term Price Patterns and Opening Range Breakout. Greenville: Traders Press, Inc.; Appel, G. (2005). Technical Analysis. NJ: Pearson Education, Inc. Concept: Trading strategy based on reversal

Friday is generally not terribly reliable in being a day where the market bounces from a low. It is one of the least popular days for this to occur (along with Wednesday). But a potential positive about a Friday bounce is that when they do occur, they tend to be the most reliable moving forward. The

Forward earnings yields are a key metric for the valuation of an equity market. Helpfully, I/B/E/S and DataStream publish forward earnings forecasts of analysts on a market-wide index basis. Unfortunately, updates of these data are delayed by multiple lags. This can make them inaccurate and

Strongly oversold markets often contain a short-term upside edge. Of course oversold can always become more oversold. Wednesday took the SPX down to a 50-day closing low. Additionally, many short-term price oscillators, like the RSI(2) showed extremely low readings. Further selling on Thursday meant

Several weeks back, I posted some work I had done on ETF fund flows and what they could tell us about how investors, on average, fare with respect to timing their entries and exits. TL;DR: Most investors are terrible at timing inflows and outflows to the market. They badly trail benchmarks because

In this post we’re going to continue our work with the Consistent Momentum strategy that we explored here. Initial investigation of the strategy (kindly provided by the good folk at Quantpedia) proved to be relatively good, with a CAGR of +19% and a single losing year through the test period. One

The CAPM was the first formal asset-pricing model. Market beta was its sole factor. With the 1992 publication of their paper, “The Cross-Section of Expected Stock Returns,” Eugene Fama and Kenneth French introduced a new-and-improved three-factor model, adding size and value to market beta as

Since my last post I have been investigating training features that can be derived from my Currency Strength indicator as input for machine learning algorithms and during this work it was obvious that there are instances in the raw data that are Black Swan outliers. This can be seen in the chart

One of the perennial difficulties in developing statistical arbitrage strategies is the lack of reliable methods of estimating a stationary portfolio comprising two or more securities. In a prior post (below) I discussed at some length one of the primary reasons for this, i.e. the lower power of

Last week was a good reminder that there is no ironclad law that rates and equities can’t sell-off at the same time. Strategic diversification with bonds is akin to an uncertain insurance policy whose price and ultimate payoff in the event of a market crash is highly dependent on the level and

Are returns this year actually different than what can be expected from a typical year? Is the variance actually different than what can be expected from a typical year? Those are fairly light, easy to answer questions. We can use tests for equality of means or equality of variances. But how about

Factors, or “style” investing, seems to be all the rage these days, including the use of factors in fixed income (here, here and here are good places to start). However, many of these strategies focus on CUSIP level bond selection. This means executing a strategy with a fair amount of turnover