RESEARCH

Building a Long Volatility Strategy without Using Options

  • 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

July 2021. Reading Time: 10 Minutes.

Factor Olympics Q2 2021

  • 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

July 2021. Reading Time: 10 Minutes.

Factor Exposure Analysis: Exploring Residualization

  • Regression analysis is frequently subject to multicollinearity
  • Independent variables can be residualized
  • Using residualized variables in a factor exposure analysis identifies different drivers

June 2021. Reading Time: 10 Minutes.

Avoiding Disasters with Catastrophe Bonds

  • 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

June 2021. Reading Time: 10 Minutes.

Mid-Caps: The Hidden Champions?

  • 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

June 2021. Reading Time: 10 Minutes.

Liquid Alt Juggernauts: Worth their Salt?

  • 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

June 2021. Reading Time: 10 Minutes.

The Case Against EM Equities

  • 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

June 2021. Reading Time: 10 Minutes.

Portfolio Construction in Venture Capital

  • 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

May 2021. Reading Time: 10 Minutes.

Managed Futures: Fast & Furious vs Slow & Steady

  • 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

May 2021. Reading Time: 10 Minutes.

60/40 Portfolios without Bonds

  • 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

May 2021. Reading Time: 10 Minutes.

Factor Investing: The Truth Has Many Shades

  • 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

May 2021. Reading Time: 10 Minutes.

MYTH-BUSTING: MONEY PRINTING MUST CREATE INFLATION

  • 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

April 2021. Reading Time: 10 Minutes.

TIME MACHINES FOR INVESTORS

  • 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

April 2021. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q1 2021

  • Q1 2021 featured a major factor rotation
  • Value & Size, the losers of previous years, are leading the scoreboard
  • In contrast, Momentum, Quality, and Low Volatility have generated negative returns

April 2021. Reading Time: 10 Minutes.

MYTH-BUSTING: EARNINGS DON’T MATTER MUCH FOR STOCK RETURNS

  • There is no strong relationship between stock returns and earnings
  • This is regardless of current or expected earnings
  • High earnings growth does not lead to high P/E ratios

March 2021. Reading Time: 10 Minutes.

MULTI-STRATEGY HEDGE FUNDS: EQUITY IN A DIFFERENT SHADE?

  • Investors can outsource the hedge fund selection process to multi-strategy hedge funds
  • These have outperformed broad hedge fund indices since 2005
  • However, most of the returns can be attributed to simple equity exposure

March 2021. Reading Time: 10 Minutes.

DOES FINANCIAL LEVERAGE MAKE STOCKS RISKIER? PART II

  • The most leveraged stocks were not riskier than the least leveraged ones on a cross-sector basis
  • However, this changes when portfolios are created sector-neutral
  • In this case, the least leveraged stocks also generated higher returns and risk-return ratios

March 2021. Reading Time: 10 Minutes.

GOOD VERSUS BAD VALUE STOCKS

  • Value stocks can be easily filtered by applying quality metrics in order to sort out value traps
  • Value & High Quality generated higher returns than Value in Europe and Japan, but not in the US
  • However, from a risk perspective, metrics improved across all markets

March 2021. Reading Time: 10 Minutes.

ALPHA GENERATION: THE SEARCH FOR THE UNEXPLAINABLE

  • The performance of equity market neutral hedge funds, both discretionary and systematic, can be fully explained by market beta and equity factors
  • At their peak, systematic managers brought in twice as much unexplained returns  versus their discretionary counterparts, however, their factor loadings explain this difference
  • Given that we understand their performance drivers, these can be replicated efficiently

February 2021. Reading Time: 10 Minutes.

MYTH-BUSTING: LOW RATES DON’T JUSTIFY HIGH VALUATIONS

  • 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

February 2021. Reading Time: 10 Minutes.

MARKET TIMING VIA THE VRP?

  • 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

February 2021. Reading Time: 10 Minutes.

OH, QUALITY, WHERE ART THOU?

  • 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

January 2021. Reading Time: 10 Minutes.

MUSINGS ABOUT FACTOR EXPOSURE ANALYSIS

  • 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

January 2021. Reading Time: 10 Minutes.

FACTOR OLYMPICS 2020

  • 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

January 2021. Reading Time: 10 Minutes.

RESEARCH COMPENDIUM 2020

  • Contains more than 50 research papers that we published on FactorResearch.com and other media in 2020
  • Focus on factor investing and quantitative strategies from an investor’s perspective
  • They are kept brief, as simple as possible, and will hopefully stimulate debate

December 2020. Reading Time: Several hours.

THE VALUE FACTOR’S PAIN: ARE INTANGIBLES TO BLAME?

  • 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 

December 2020. Reading Time: 10 Minutes.

MINIMUM CORRELATION FACTOR PORTFOLIOS

  • Minimizing factor correlations is a common approach to creating multi-factor portfolios
  • However, the diversification benefits from minimizing the correlations of long-only two-factor portfolios were marginal
  • This suggests that investors should not focus too much on correlations when combining smart beta strategies

December 2020. Reading Time: 10 Minutes.

ESG DATA: DAZED AND CONFUSED

  • Case study of one ESG data set from a well-known provider
  • Highly ranked ESG stocks do not have better fundamentals 
  • Stocks with the worst rating outperformed over the past 12 months 

November 2020. Reading Time: 10 Minutes.

HEDGE FUND BATTLE: DISCRETIONARY VS SYSTEMATIC INVESTING

  • 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 returns, and featured no performance consistency

November 2020. Reading Time: 10 Minutes.

EXPLORING DEFINED OUTCOME ETFS

  • 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

November 2020. Reading Time: 10 Minutes.

MARKET NEUTRAL FUNDS: POWERED BY BETA?

  • 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 exposure analysis reveals unusual factor loadings

November 2020. Reading Time: 10 Minutes.

THE DEAD VERSUS THE LIVING STOCKS

  • 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

November 2020. Reading Time: 10 Minutes.

DON’T GET CARRIED AWAY BY CARRY

  • 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

October 2020. Reading Time: 10 Minutes.

FACTOR EXPOSURE ANALYSIS 101

  • 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

October 2020. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q3 2020

  • 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

October 2020. Reading Time: 10 Minutes.

DOES FINANCIAL LEVERAGE MAKE STOCKS RISKIER?

  • 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

September 2020. Reading Time: 10 Minutes.

AGING & EQUITIES: SELLING STOCKS FOR THE LONG-TERM

  • 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

September 2020. Reading Time: 10 Minutes.

CROIC, CFROI, CROCI & CROCS

  • Cash-return-on-invested-capital (CROIC) has been proposed by some as a superior Value metric
  • Since the GFC in 2009, CROIC generated consistently positive compared to flat (or negative) returns from traditional valuation metrics
  • However, CROIC turns out to be just a simple combination of Value & Quality factors

September 2020. Reading Time: 10 Minutes.

VOLATILITY HEDGE FUNDS: THE GOOD, THE BAD, AND THE UGLY 

  • 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

September 2020. Reading Time: 10 Minutes.

PICKING PROFITABLE BUSINESSES CAN BE HIGHLY UNPROFITABLE

  • 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

August 2020. Reading Time: 10 Minutes.

HOW RISKY ARE VALUE STOCKS?

  • 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

August 2020. Reading Time: 10 Minutes.

BANK RISK PREMIA INDICES: UNBANKABLE?

  • 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

August 2020. Reading Time: 10 Minutes.

FACTOR INVESTING IN SINGAPORE

  • 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

August 2020. Reading Time: 10 Minutes.

CREATING ANTI-FRAGILE PORTFOLIOS

  • 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

August 2020. Reading Time: 10 Minutes.

GLOBAL MACRO: MASTERS OF THE UNIVERSE?

  • 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

July 2020. Reading Time: 10 Minutes.

EM EQUITIES VS DEBT: SAME, SAME, BUT DIFFERENT?

  • 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

July 2020. Reading Time: 10 Minutes.

CAP-WEIGHTED BENCHMARKS: GOOD MOMENTUM BETS?

  • 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

July 2020. Reading Time: 10 Minutes.

FACTOR OLYMPICS 1H 2020

  • 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

July 2020. Reading Time: 10 Minutes.

THE VARIANCE RISK PREMIUM: WHAT PREMIUM?

  • 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

June 2020. Reading Time: 10 Minutes.

NO LONGER SUPERHEROES? TWILIGHT OF THE BONDS

  • 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

June 2020. Reading Time: 10 Minutes.

MUSINGS ON LOW VOLATILITY

  • 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

June 2020. Reading Time: 10 Minutes.

DEFENSIVE & DIVERSIFYING STRATEGIES: WHAT WORKED IN 2020?

  • 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

June 2020. Reading Time: 10 Minutes.

BONDS & THE INVISIBLE THIEF

  • 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

June 2020. Reading Time: 10 Minutes.

TACTICAL ETFS: TACTFULLY NO, THANK YOU?

  • 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

May 2020. Reading Time: 10 Minutes.

CHEAP VS EXPENSIVE FACTORS

  • Factors can be valued like stocks
  • Factor valuations have not changed structurally over the last 30 years
  • Cheap factors outperformed expensive ones on average

May 2020. Reading Time: 10 Minutes.

THE CASE AGAINST FACTOR INVESTING

  • 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

May 2020. Reading Time: 10 Minutes.

MERGER ARBITRAGE: ARBITRAGED AWAY?

  • 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

May 2020. Reading Time: 10 Minutes.

TAIL RISK HEDGE FUNDS

  • 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

April 2020. Reading Time: 10 Minutes.

TAIL RISK HEDGE FUNDS

  • 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

April 2020. Reading Time: 10 Minutes.

SMART BETA FIXED INCOME ETFS

  • 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

April 2020. Reading Time: 10 Minutes.

LOW VOL-MOMENTUM VS VALUE-MOMENTUM PORTFOLIOS

  • 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

April 2020. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q1 2020

  • Beta-neutral long-short factors were largely negative during Q1 2020
  • Momentum & Quality are leading the performance leaderboard
  • Investors were most negative on small cap and cheap stocks

April 2020. Reading Time: 10 Minutes.

THOU SHALL NOT SHORT THE VIX

  • 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 caution

March 2020. Reading Time: 10 Minutes.

THEMATIC INVESTING: THEMATICALLY WRONG?

  • 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

March 2020. Reading Time: 10 Minutes.

EM DEBT: TO HOLD, OR NOT TO HOLD?

  • 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

March 2020. Reading Time: 10 Minutes.

LOVM PORTFOLIOS AROUND THE WORLD

  • Low Volatility-Momentum portfolios outperformed markets across regions over the last 30 years
  • The combination model generated consistently the highest excess returns
  • Low correlation between the two factors provided significant diversification benefits

March 2020. Reading Time: 10 Minutes.

ESG VS LOW CARBON INVESTING

  • 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 

March 2020. Reading Time: 10 Minutes.

LOVM: LOW VOLATILITY-MOMENTUM PORTFOLIOS

  • Low Volatility-Momentum portfolios in the US outperformed the stock market since 1989
  • Investors can use various multi-factor models for combining the two factors, which results in different portfolios
  • Valuations have increased and the multiple expansion is mainly explained by Momentum, not Low Volatility 

February 2020. Reading Time: 10 Minutes.

VENTURE CAPITAL: WORTH VENTURING INTO?

  • 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 

February 2020. Reading Time: 10 Minutes.

TIMING LOW VOLATILITY WITH FACTOR VALUATIONS

  • 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

February 2020. Reading Time: 10 Minutes.

SENTIMENT & FACTOR PERFORMANCE

  • 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 

February 2020. Reading Time: 10 Minutes.

LIQUIDITY & FACTOR PERFORMANCE

  • 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

January 2020. Reading Time: 10 Minutes.

PRIVATE EQUITY: FOOLING SOME PEOPLE ALL THE TIME?

  • 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

January 2020. Reading Time: 10 Minutes.

HOW EXPENSIVE ARE ESG STOCKS?

  • 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

January 2020. Reading Time: 10 Minutes.

FACTOR SCORING SMART BETA ETFS

  • 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

January 2020. Reading Time: 10 Minutes.

FACTOR OLYMPICS 2019

  • 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

January 2020. Reading Time: 10 Minutes.

RESEARCH COMPENDIUM 2019

  • Contains more than 50 research papers that we published on FactorResearch.com and other media in 2019
  • Focus on factor investing and quantitative strategies from an investor’s perspective
  • They are kept brief, as simple as possible, and will hopefully stimulate debate

December 2019. Reading Time: Several hours.

GLOBAL PENSION FUNDS: THE COMING STORM

  • 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

December 2019. Reading Time: 10 Minutes.

HOW TO EVALUATE SMART BETA ETFS

  • 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   

December 2019. Reading Time: 10 Minutes.

WHY PENSION FUNDS & MILLENNIALS SHOULD AVOID ESG

  • 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   

December 2019. Reading Time: 10 Minutes.

DO ACTIVIST INVESTORS CREATE VALUE?

  • 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   

November 2019. Reading Time: 10 Minutes.

EQUITY VS BOND INDICES

  • 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   

November 2019. Reading Time: 10 Minutes.

THE CASE AGAINST REITS

  • 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

November 2019. Reading Time: 10 Minutes.

FACTOR INVESTING IN EMERGING MARKETS

  • 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 

November 2019. Reading Time: 10 Minutes.

THE COMPLEXITY OF FACTOR EXPOSURE ANALYSIS

  • 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

October 2019. Reading Time: 10 Minutes.

THE CASE AGAINST EQUITY INCOME FUNDS

  • 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

October 2019. Reading Time: 10 Minutes.

AI, WHAT HAVE YOU DONE FOR ME LATELY?

  • 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

October 2019. Reading Time: 10 Minutes.

LOW VOLATILITY VS OPTION-BASED STRATEGIES

  • 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

October 2019. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q3 2019

  • 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

October 2019. Reading Time: 10 Minutes.

SMART BETA VS ALPHA + BETA

  • 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

September 2019. Reading Time: 10 Minutes.

IS LOW VOL THE NEW VALUE?

  • 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

September 2019. Reading Time: 10 Minutes.

HEDGING VIA MANAGED FUTURES LIQUID ALTS

  • Managed futures strategies provided attractive diversification benefits during the financial crisis
  • The strategies have become available as mutual funds and ETFs
  • Mutual funds provide the same exposure as private vehicles, ETFs do not

September 2019. Reading Time: 10 Minutes.

IMPROVING THE ODDS OF VALUE: II

  • 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

September 2019. Reading Time: 10 Minutes.

FACTOR INVESTING ON COUNTRY LEVEL

  • 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

August 2019. Reading Time: 10 Minutes.

HOW PAINFUL CAN FACTOR INVESTING GET?

  • 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 

August 2019. Reading Time: 10 Minutes.

QUANT STRATEGIES: THEORY VS REALITY

  • 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

August 2019. Reading Time: 10 Minutes.

LOW VOL FACTOR: FROM OBSCURITY TO STARDOM

  • 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 concerning currently

August 2019. Reading Time: 10 Minutes.

GROWTH: FACTOR INVESTING SINNING?

  • Growth stocks outperformed the US stock market since 1992
  • However, the higher returns are explained by higher betas
  • The long-short factor performance was negative, even if adjusted for other factor exposure

August 2019. Reading Time: 10 Minutes.

PMI & EQUITY FACTOR PERFORMANCE

  • 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

July 2019. Reading Time: 10 Minutes.

ESG: WHAT’S UNDER THE HOOD?

  • 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

July 2019. Reading Time: 10 Minutes.

INDEXING: OUT WITH TRADITION?

  • 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

July 2019. Reading Time: 10 Minutes.

FACTOR OLYMPICS 1H 2019

  • 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

July 2019. Reading Time: 10 Minutes.

MAPPING MY MIND: VALUE FACTOR

  • 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

June 2019. Reading Time: 10 Minutes.

A HORSE RACE OF LIQUID ALTERNATIVES

  • 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

June 2019. Reading Time: 10 Minutes.

THE CASE AGAINST SMALL CAPS

  • 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

June 2019. Reading Time: 10 Minutes.

HOW TO ALLOCATE SMARTLY TO SMART BETA

  • 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 portfolios generated excess returns in two out of three regions since 2008

June 2019. Reading Time: 10 Minutes.

CHEAP VERSUS EXPENSIVE COUNTRIES

  • 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

May 2019. Reading Time: 10 Minutes.

IMPROVING THE MOMENTUM FACTOR

  • 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

May 2019. Reading Time: 10 Minutes.

HEDGE FUND ETFS

  • 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

May 2019. Reading Time: 10 Minutes.

OPTION-BASED STRATEGIES: OPT IN OR OPT OUT?

  • 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 hedge funds for reducing risk

May 2019. Reading Time: 10 Minutes.

EQUITY FACTORS & THE MIGHTY US DOLLAR

  • 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

April 2019. Reading Time: 10 Minutes.

REPLICATING FAMOUS HEDGE FUNDS

  • 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

April 2019. Reading Time: 10 Minutes.

WARREN BUFFETT: THE GREATEST FACTOR INVESTOR OF ALL TIME?

  • 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

April 2019. Reading Time: 10 Minutes.

MULTI-FACTOR SMART BETA ETFS

  • 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 to established ones such as quality and momentum

April 2019. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q1 2019

  • 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

April 2019. Reading Time: 10 Minutes.

BLACK SWANS, MAJOR EVENTS & FACTOR RETURNS

  • 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

March 2019. Reading Time: 10 Minutes.

SMART BETA ASSET ALLOCATION MODELS 

  • 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

March 2019. Reading Time: 10 Minutes.

GARP INVESTING: GOLDEN OR GARBAGE?   

  • 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

March 2019. Reading Time: 10 Minutes.

BENCHMARKING SMART BETA ETFS

  • 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

March 2019. Reading Time: 10 Minutes.

MINIMUM VARIANCE VERSUS LOW VOLATILITY

  • 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

February 2019. Reading Time: 10 Minutes.

FACTOR INVESTING IN FINANCIALS, REITS & MLPS

  • 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

February 2019. Reading Time: 10 Minutes.

SMART BETA: BROKEN BY DESIGN?

  • 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

February 2019. Reading Time: 10 Minutes.

CAN VALUE INVESTORS DO GOOD?

  • ESG factors underperformed the Value factor and market since 2009
  • Integrating ESG in Value investing decreased returns, but increased risk-return ratios
  • Residual ESG factors are likely to generate negative returns given the focus on stakeholders, not shareholders

February 2019. Reading Time: 10 Minutes.

VALUE, MOMENTUM & CARRY ACROSS ASSET-CLASSES

  • 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

January 2019. Reading Time: 10 Minutes.

CORPORATE DEBT IN THE CHINESE STOCK MARKET

  • 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

January 2019. Reading Time: 10 Minutes.

ESG INVESTING: TOO GOOD TO BE TRUE?

  • 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

January 2019. Reading Time: 10 Minutes.

AN ANATOMY OF SMART BETA VALUE ETFS

  • 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

January 2019. Reading Time: 10 Minutes.

FACTOR OLYMPICS 2018

  • 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

January 2019. Reading Time: 10 Minutes.

RESEARCH COMPENDIUM 2018

  • Contains 50 research papers and 4 white papers that we published on FactorResearch.com and other media in 2018
  • Focus on factor investing and quantitative strategies from an investor’s perspective
  • They are kept brief, as simple as possible, and will hopefully stimulate debate

December 2018. Reading Time: Several Hours.

FACTOR INVESTING MADE IN CHINA

  • 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 drivers that permeate even emerging and isolated markets

December 2018. Reading Time: 10 Minutes.

WHITE PAPER: FACTOR OPTIMISATION

  • 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

December 2018. Reading Time: 10 Minutes.

PRIVATE EQUITY: THE EMPEROR HAS NO CLOTHES

  • 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 at all-time-highs, lowering expected returns

December 2018. Reading Time: 10 Minutes.

TACTICAL STATISTICAL ARBITRAGE

  • Statistical arbitrage behaves similarly across markets
  • Volatility is the main performance driver
  • Attractive strategy for diversifying an equity portfolio

November 2018. Reading Time: 10 Minutes.

THE RISE OF ZOMBIE STOCKS

  • 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

November 2018. Reading Time: 10 Minutes.

EQUITY FACTORS: REDUCING PORTFOLIO TURNOVER

  • 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

November 2018. Reading Time: 10 Minutes.

THE ODD FACTORS: PROFITABILITY & INVESTMENT

  • 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

November 2018. Reading Time: 10 Minutes.

THE DARK SIDE OF LOW VOLATILITY-STOCKS

  • Low-volatility stocks have outperformed the market over the last 25 years
  • The strategy has reduced equity drawdowns in the US, Europe, and Japan
  • However, low-volatility stocks have been bond-proxies, which poses risk when rates rise

October 2018. Reading Time: 10 Minutes.

THE DARK SIDE OF LOW VOLATILITY-STOCKS

  • Low-volatility stocks have outperformed the market over the last 25 years
  • The strategy has reduced equity drawdowns in the US, Europe, and Japan
  • However, low-volatility stocks have been bond-proxies, which poses risk when rates rise

October 2018. Reading Time: 10 Minutes.

STATISTICAL ARBITRAGE IN THE US

  • 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

October 2018. Reading Time: 10 Minutes.

IMPROVING THE ODDS OF VALUE

  • 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

October 2018. Reading Time: 10 Minutes.

FACTOR INVESTING IN MICRO & SMALL CAPS

  • 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
  • Focusing on factors improves risk-adjusted returns across market cap segments

October 2018. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q3 2018

  • 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

October 2018. Reading Time: 10 Minutes.

LIQUID ALTERNATIVES: ALTERNATIVE ENOUGH?

  • 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

September 2018. Reading Time: 10 Minutes.

SHORT-TERM MOMENTUM IN EQUITY FACTORS

  • 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

September 2018. Reading Time: 10 Minutes.

VOLATILITY, DISPERSION & CORRELATION – FRIENDS OR FOES?

  • 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

September 2018. Reading Time: 10 Minutes.

CHASING MUTUAL FUND PERFORMANCE

  • 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

September 2018. Reading Time: 10 Minutes.

FACTOR MOMENTUM

  • 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

August 2018. Reading Time: 10 Minutes.

HOW CROWDED ARE TECH STOCKS?

  • Equity crowding models can be applied to factors and sectors
  • Crowding leads to more frequent drawdowns
  • Tech sector was crowded over the last 12 months

August 2018. Reading Time: 10 Minutes.

LOW VOLATILITY, LOW BETA & LOW CORRELATION

  • 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

August 2018. Reading Time: 10 Minutes.

FACTOR EXPOSURE: SMART BETA ETFS VS MUTUAL FUNDS

  • 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

August 2018. Reading Time: 10 Minutes.

MOMENTUM VARIATIONS

  • 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

August 2018. Reading Time: 10 Minutes.

FACTORS: SHORTING STOCKS VS THE INDEX 

  • 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

July 2018. Reading Time: 10 Minutes.

ETFS, SMART BETA & FACTOR EXPOSURE

  • 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

July 2018. Reading Time: 10 Minutes.

STOCK PORTFOLIO OPTIMISATION

  • 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

July 2018. Reading Time: 10 Minutes.

IMPACT OF SINGLE STOCKS ON FACTOR RETURNS

  • 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

July 2018. Reading Time: 10 Minutes.

WHITE PAPER: FACTOR CROWDING MODEL

  • 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

July 2018. Reading Time: 15 Minutes.

FACTOR OLYMPICS 1H 2018

  • 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

July 2018. Reading Time: 10 Minutes.

FACTOR CROWDING VIA VALUATIONS

  • Fundamental factor valuations can be used to identify factor crowding
  • However, the approach does not improve risk metrics
  • A multi-metric approach for identifying factor crowding is likely more successful

June 2018. Reading Time: 10 Minutes.

SECTOR VERSUS COUNTRY MOMENTUM

  • 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

June 2018. Reading Time: 10 Minutes.

SKEWNESS AS A FACTOR

  • 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

June 2018. Reading Time: 10 Minutes.

MARKET TIMING WITH MULTIPLES, MOMENTUM & VOLATILITY

  • 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

June 2018. Reading Time: 10 Minutes.

TACTICAL MEAN-REVERSION

  • 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

May 2018. Reading Time: 10 Minutes.

MEAN-REVERSION ACROSS MARKETS

  • The Mean-Reversion factor shows the same trends across markets
  • The strategy differentiates itself from other factors by exhibiting strong positive skewness
  • Mean-Reversion is an attractive diversifier for an equity-centric portfolio

May 2018. Reading Time: 10 Minutes.

ALPHA MOMENTUM

  • Stocks can be ranked by alpha instead of stock returns
  • Alpha Momentum generates a higher and more consistent performance than Price Momentum
  • Momentum crashes are reduced significantly and risk-return ratios increase

May 2018. Reading Time: 10 Minutes.

VALUE FACTOR: COMPARISON OF VALUATION METRICS

  • Price-to-book is not an effective valuation metric
  • There is not one valuation metric that is superior across markets
  • Combining multiple metrics generates the highest risk-adjusted returns

May 2018. Reading Time: 10 Minutes.

EQUITY FACTORS & INFLATION

  • Factor performance is impacted by inflation and deflation
  • An inflationary environment is more attractive for most factors
  • The change in inflation has been most meaningful for the Size factor

April 2018. Reading Time: 10 Minutes.

VALUE FACTOR: IMPROVING THE TAX EFFICIENCY

  • The tax efficiency of the Value factor can be improved by reducing exposure to dividend-yielding stocks
  • Improving the tax efficiency reduces the performance in Europe and Japan, but not in the US
  • Reducing turnover can be considered for minimising capital gains and stamp duty taxes

April 2018. Reading Time: 10 Minutes.

LOW VOLATILITY FACTOR: INTEREST RATE-SENSITIVITY & SECTOR-NEUTRALITY

  • The interest rate-sensitivity of the Low Volatility factor has increased in recent years
  • Mainly due to the sectoral biases from the long portfolio
  • Sector-neutrality reduces the interest rate-sensitivity, albeit at the cost of performance

April 2018. Reading Time: 10 Minutes.

SMART BETA OR SMART MARKETING?

  • Smart beta ETF investors seem to ignore empirical evidence
  • Excess returns from smart beta are substantially different from factor returns
  • Smart beta ETFs offer little diversification for an equity-centric portfolio

April 2018. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q1 2018

  • 2018 started negative for the majority of factors
  • Momentum, Quality and Growth showed the strongest performance
  • Low Volatility, Dividend Yield and Value generated negative returns

April 2018. Reading Time: 10 Minutes.

FACTOR EXPOSURE ANALYSIS: DOW JONES

  • Factor exposure should be considered a source of returns as well as of risk
  • Factor biases can be measured top-down or bottom-up
  • The results of the two approaches do not necessarily reconcile

March 2018. Reading Time: 10 Minutes.

FACTOR PORTFOLIOS: TURNOVER ANALYSIS

  • Factor portfolios have an annual turnover over more than 100%
  • The turnover rate varies substantially across factors
  • Decreasing the rebalancing frequency reduces turnover, but also risk-return ratios

March 2018. Reading Time: 10 Minutes.

EQUITY FACTORS & GDP GROWTH

  • Economic cycles have a clear impact on factor performance
  • Some factors show pro-cyclical while others highlight anti-cyclical characteristics
  • Given that real GDP is not published in real-time, it is unlikely effective for factor selection

March 2018. Reading Time: 10 Minutes.

DIVIDEND YIELD COMBINATIONS

  • Buying high yielding and selling low yielding stocks is not an attractive strategy
  • Combining Dividend Yield with Quality & Growth factors improves the performance
  • Interestingly Dividend Growth adds relatively little value

March 2018. Reading Time: 10 Minutes.

FACTOR CONSTRUCTION: PORTFOLIO REBALANCING

  • Factor portfolios do not benefit significantly from intra-month rebalancing
  • However, too infrequent rebalancing leads to lower risk-return ratios
  • The robustness of factor performance at different rebalancing periods is one of the advantages of factor investing

February 2018. Reading Time: 10 Minutes.

SEQUENTIAL MODEL: SORTING BY 5 FACTORS

  • The sequential model ranks stocks by factors sequentially
  • Allows investors to prioritise factors and results in concentrated portfolios
  • However, the factor sequence matters and only a few factors can be considered

February 2018. Reading Time: 10 Minutes.

VALUE FACTOR: INTRA VS CROSS-SECTOR

  • Intra versus cross-sector Value portfolios share the major trends
  • Neutralising the sector exposure increases the risk-return ratio of the Value factor
  • However, the benefits are marginal and come with higher operational complexity

February 2018. Reading Time: 10 Minutes.

WHAT’S IN A FACTOR? BREAKDOWN BY SECTORS

  • Some factors show structural sector exposure while others rotate sectors frequently
  • Sector concentrations explain factor performance and may represent concentration risks
  • Value is currently long Financials, Low Volatility is short Health Care, and Growth is short Energy

February 2018. Reading Time: 10 Minutes.

FACTOR ETFS & FUTURES

  • Investors can directly access factor returns via ETFs in the US & futures in Europe
  • However, neither of these come without some investor concerns
  • Realised returns differ substantially from theoretical returns

February 2018. Reading Time: 10 Minutes.

WHITE PAPER: FACTOR ALLOCATION MODELS

  • Factor timing and factor risk management are related concepts, but have different objectives
  • Factors have unique characteristics that require a tailored risk management approach
  • A multi-dimensional factor risk management model shows consistent increases in risk-return ratios and decreases in maximum drawdowns across markets

January 2018. Reading Time: 15 Minutes.

VALUE & MOMENTUM FACTOR PORTFOLIOS

  • Value and Momentum compliment each other given a low or negative correlation
  • Investors have different options for combining these two factors
  • The multi-factor model selection will be determined by investor preferences

January 2018. Reading Time: 10 Minutes.

FACTOR INVESTING: GROSS TO NET RETURNS

  • Long-short multi-factor portfolios generate attractive returns before fees
  • Returns are much less attractive post fees charged historically
  • However, some fees in the long-short space are likely justified given higher complexity

January 2018. Reading Time: 10 Minutes.

WHITE PAPER: MULTI-FACTOR MODELS 101

  • Three common approaches for creating multi-factor portfolios are the Combination, the Intersectional and the Sequential models
  • The results from the Combination and Intersectional models are comparable in terms of trend
  • Each model has its own advantages and disadvantages, the selection will depend on investor preferences

January 2018. Reading Time: 15 Minutes.

RESEARCH COMPENDIUM 2017

  • Contains 34 research papers that we published on FactorResearch.com in 2017
  • Focus on factor investing and quantitative strategies from an investor’s perspective
  • They are kept brief, as simple as possible, and will hopefully stimulate debate

December 2017. Reading Time: Several hours.

FACTOR OLYMPICS 2017

  • 2017 was a positive year for most factors
  • Quality, Growth and Momentum showed the strongest performance
  • Value, Dividend Yield and Size generated negative returns

January 2018. Reading Time: 10 Minutes.

FACTOR-RETURNS: YEAR-END CALENDAR EFFECTS

  • Value & Size generate abnormally large positive returns in January, Momentum negative returns
  • Abnormal returns are limited to the last week of December and first week of January
  • Difficult to harvest these returns efficiently due to illiquidity of markets at these times

December 2017. Reading Time: 10 Minutes.

MEAN-REVERSION ON EQUITY INDEX LEVEL

  • Mean-Reversion on index level became profitable post the 1970s, before that Momentum dominated
  • The structural shift from Momentum to Mean-Reversion is consistent across markets
  • Likely explained by the evolution of financial markets

December 2017. Reading Time: 10 Minutes.

INTERSECTIONAL MODEL: SORTING BY 7 FACTORS

  • Focusing purely on Value is a difficult strategy
  • Sorting by multiple factors improves performance and risk-metrics
  • However, factor selection and allocation remain challenging topics

December 2017. Reading Time: 10 Minutes.

FACTOR CONSTRUCTION: PORTFOLIO SCENARIOS

  • Most researchers create factor portfolios by taking the top & bottom 30% of stocks, which results in large portfolios
  • Portfolios can be reduced, but firm risks start influencing factor returns with too few stocks
  • Most investors are likely better of buying factor products then building factor portfolios themselves

November 2017. Reading Time: 10 Minutes.

QUANT STRATEGIES IN THE CRYPTOCURRENCY SPACE

  • Cryptocurrencies have reached a market capitalisation of > $150 billion
  • Backtesting quantitative strategies is difficult given a limited trading history & universe
  • Short-term Momentum works very well, classic factor investing strategies less so

November 2017. Reading Time: 10 Minutes.

HEDGE FUND FACTOR EXPOSURE & ALTERNATIVES

  • Equity hedge fund returns have been disappointing over the last 14 years
  • An exposure analysis shows no structural factor exposure, but frequent factor rotation
  • Multi-factor long-short products are an interesting alternative, depending on the fee level

November 2017. Reading Time: 10 Minutes.

INTEGRATED VALUE, GROWTH, & QUALITY PORTFOLIOS

  • Integrated Value, Growth & Quality portfolios generated attractive returns year-to-date 2017
  • Sorting stocks on several characteristics results in relatively smooth performance
  • Mitigates the issue of factor timing, but not of factor selection

November 2017. Reading Time: 10 Minutes.

RESIST THE SIREN CALL OF HIGH DIVIDENDS

  • Buying high yielding and selling low yielding stocks has been an attractive strategy since 2000
  • However, it has been a highly unattractive strategy over the last century
  • Investors should resist the Siren call of high yielding stocks and focus on other factors

October 2017. Reading Time: 10 Minutes.

FACTOR RETURNS: SMALL VS LARGE CAPS

  • A frequent criticism of factor investing is that factor returns are stronger in small caps
  • Our research highlights that this is not uniformly true across factors
  • Value and Size benefit most from including small caps

October 2017. Reading Time: 10 Minutes.

HEDGING MARKET CRASHES WITH FACTOR EXPOSURE

  • None of the factors consistently generated positive performance during recent market crashes
  • However, almost any factor exposure would have increased the risk-return ratio of an equity-centric portfolio
  • Low Volatility and Mean-Reversion would have been most beneficial, Momentum least

October 2017. Reading Time: 10 Minutes.

DEATH, TAXES, AND MEAN-REVERSION?

  • Mean-reversion has not performed well over the last few years
  • Highly sensitive to model assumptions
  • The strategy is an attractive addition for an equity-centric portfolio

October 2017. Reading Time: 10 Minutes.

FACTOR OLYMPICS Q3 2017

  • 2017 is on track for a good year for factor exposure as most factors are positive
  • Quality, Growth, and Momentum are headed for the winners podium
  • Value is negative across regions, giving up all of last year’s gains

October 2017. Reading Time: 10 Minutes.

QUALITY FACTOR: ZERO ALPHA FOR MOST INVESTORS?

  • It’s difficult to rationalise why there should be excess returns from high quality stocks
  • The Quality factor needs to be constructed beta-neutral to achieve positive returns
  • Exposure to the Quality factor is an attractive hedge for an equity-centric portfolio

September 2017. Reading Time: 10 Minutes.

QUALITY FACTOR: ZERO ALPHA FOR MOST INVESTORS?

  • It’s difficult to rationalise why there should be excess returns from high quality stocks
  • The Quality factor needs to be constructed beta-neutral to achieve positive returns
  • Exposure to the Quality factor is an attractive hedge for an equity-centric portfolio

September 2017. Reading Time: 10 Minutes.

QUALITY FACTOR: ZERO ALPHA FOR MOST INVESTORS?

  • It’s difficult to rationalise why there should be excess returns from high quality stocks
  • The Quality factor needs to be constructed beta-neutral to achieve positive returns
  • Exposure to the Quality factor is an attractive hedge for an equity-centric portfolio

September 2017. Reading Time: 10 Minutes.

FACTOR ALLOCATION 101: EQUAL VS VOLATILITY-WEIGHTED

  • Equal-weight and volatility-weighted allocations are two common factor allocation frameworks
  • Risk-return ratios are not higher with volatility-weighted allocations
  • Different reasons can explain the superiority of equal-weight allocations

September 2017. Reading Time: 10 Minutes.

THERE IS VALUE IN THE VALUE FACTOR

  • Equity factors can be valued using fundamental metrics
  • Value and Size are cheap while Low Volatility and Growth are expensive
  • Likely more meaningful for medium- to long-term than short-term investors

September 2017. Reading Time: 10 Minutes.

FACTORS: CORRELATION CHECK

  • Correlations between Quality and Growth factors are currently elevated
  • Value is more negatively correlated than usual to Quality, Growth and Low Volatility
  • Monitoring correlations is important for maximising diversification benefits

September 2017. Reading Time: 10 Minutes.

FACTORS: CORRELATION CHECK

  • Correlations between Quality and Growth factors are currently elevated
  • Value is more negatively correlated than usual to Quality, Growth and Low Volatility
  • Monitoring correlations is important for maximising diversification benefits

September 2017. Reading Time: 10 Minutes.

VALUE + QUALITY OR HIGH QUALITY VALUE STOCKS?

  • Investors can either combine single-factors into a portfolio or sort stocks for several factor characteristics
  • Double-sorting seems to work better for Value & Quality than Value & Momentum
  • The combination portfolios show the highest risk-return profiles, albeit at lower returns

September 2017. Reading Time: 10 Minutes.

SMART BETA & FACTOR CORRELATIONS TO THE S&P 500

  • Most smart beta products exhibit correlations of > 0.9 to the S&P 500
  • Factors show correlations of zero on average
  • However, factor correlations are highly volatile across the market cycle

August 2017. Reading Time: 10 Minutes.

SMART BETA VS FACTORS IN PORTFOLIO CONSTRUCTION

  • Investors seek smart beta products for risk reduction
  • However, smart beta products are effectively long-only products with full equity risk
  • Only factor products, i.e. long-short portfolios, offer true diversification benefits and downside protection

August 2017. Reading Time: 10 Minutes.

SMART BETA VS FACTOR RETURNS

  • Smart beta ETFs are based on factor investing research
  • Excess returns from smart beta ETFs are different from factor returns
  • Investors need to be aware that smart beta ETFs offer little diversification for an equity-centric portfolio

August 2017. Reading Time: 10 Minutes.

EQUITY FACTORS IN JAPAN

  • Japan has unique characteristics from an economic perspective
  • Factor performance in Japan mirrors global factor performance
  • Debt & demographics seem to matter less than underlying factor drivers

August 2017. Reading Time: 10 Minutes.

FACTORS & VOLATILITY-BASED RISK MANAGEMENT 

  • A common approach to factor allocation is to scale exposure by factor volatility
  • This approach improves the risk-return ratios of Momentum, but lowers them for Value and Size
  • Factors have different underlying drivers, which require different risk management systems

July 2017. Reading Time: 10 Minutes.

QUALITY FACTOR: HOW TO DEFINE IT? 

  • Different Quality definitions result in dramatically different return profiles
  • Questionable if there is structural alpha in the Quality factor
  • Investors would not have benefited significantly from exposure to Quality in the GFC

July 2017. Reading Time: 10 Minutes.

LOW VOLATILITY FACTOR: HIGH VALUATION 

  • The Low Volatility factor has generated stellar abnormal returns over the last decades
  • Current factor valuations are expensive compared to historical valuations
  • Factor volatility is at record lows and will likely surprise investors going forward

July 2017. Reading Time: 10 Minutes.

FACTORS & INTEREST RATES

  • There are no consistent relationships between Value, Size, Momentum and interest rates
  • Applies to high and low and increasing and decreasing rate environments
  • Investors shouldn’t be too concerned about factor exposure and rising rates, more about very low rates

July 2017. Reading Time: 10 Minutes.

FACTOR OLYMPICS: 1H 2017

  • 2017 seems to be a good year for factor exposure as most factors are positive
  • Growth, Quality, and Low Volatility are headed for the winners podium
  • Value is negative across regions

July 2017. Reading Time: 10 Minutes.

MOMENTUM FACTOR: INTRA VS CROSS-SECTOR 

  • Intra vs cross-sector Momentum factor profiles look remarkable similar
  • Momentum is like a force that permeates sectors and countries
  • Sector analysts need to pay attention to cross-sector Momentum

June 2017. Reading Time: 10 Minutes.

FACTOR CONSTRUCTION: BETA VS $-NEUTRALITY 

  • Factors constructed $-neutral didn’t benefit much from beta-exposure from 2000 to 2017
  • Beta-neutrality is only a must for Low Volatility
  • However, beta-neutral factors offer lower correlation to long-only indices

June 2017. Reading Time: 10 Minutes.

MARKET & FACTOR VOLATILITY 

  • Factor volatility mirrors market volatility
  • Market volatility is higher than factor volatility
  • Momentum has a higher volatility than Value or Size

June 2017. Reading Time: 10 Minutes.

VALUE & QUALITY FACTOR VALUATIONS 

  • Value and Quality stocks are typically polar opposites from a valuation perspective
  • The Value factor can be considered cheap across developed markets
  • The Quality factor is cheap in some and expensive in other markets

June 2017. Reading Time: 10 Minutes.

VALUE US SECTORAL ANALYSIS

  • Using price-to-book (PB) or price-to-earnings (PE) results in similar Value factor performance
  • Some sectors are perpetually expensive while others are always cheap
  • Sector rotation is higher with PE than with PB

May 2017. Reading Time: 10 Minutes.

MARKET TIMING VS RISK MANAGEMENT

  • Behavioural biases cause the average human to make sub-optimal investment decisions
  • Market timing should not be attempted
  • Simple and robust risk management systems may help overcome some of our issues

May 2017. Reading Time: 10 Minutes.

SIZE FACTOR

  • Size as a factor shows little consistency in generating positive returns over time
  • Investors do not seem to get compensated for the higher risks of holding small caps
  • If small cap exposure is still desired, best to implement via a small cap ETF

May 2017. Reading Time: 10 Minutes.

FACTORS & BEHAVIOURAL BIASES

  • Investors are humans and not the homo economicus
  • Investing is influenced by a wide variety of behavioural biases
  • Factors can be explained by a single or multiple biases

May 2017. Reading Time: 10 Minutes.