Research Insights

Is Sector Neutrality in Factor Investing a Mistake?

The justification for neutralizing sectors in factor strategies is a work in progress. To date, academic researchers haven't had an empirical model to mimic the impact of removing sector "effects" on the measurement and performance of factor strategies. The authors develop and test a two-component model to address the question of, "Is Sector Neutrality in Factor Investing a Mistake?"

Minimizing the Risk of Cross-Sectional Momentum Crashes

While the empirical research on cross-sectional (long-short) momentum has shown that returns have been high, investors have also experienced huge drawdowns—momentum exhibits both high kurtosis and negative skewness. Since 1926 there have been several momentum crashes that featured short, but persistent, periods of highly negative returns. For example, from June to August 1932, the momentum portfolio lost about 91%, followed by a second drawdown from April to July 1933.

Global Factor Performance: April 2024

The following factor performance modules have been updated on our Index website.[ref]free access for financial professionals[/ref] Factor Performance Factor Premiums Factor Data Downloads

Fee Variation in Private Equity

Given the significant growth of investment in private markets, there have been increasing demands for greater transparency in the operation and structure of private market funds. This paper aims to address questions such as whether fees are set uniformly within most funds, and if not, by how much do they vary.

How the Stock Market Impacts Investor Mental Health

Studies have found that there is a correlation between stock market downturns and an increase in hospital admissions for mental illness, an increase in domestic violence, deteriorating mental health among retirees, and increased depression rates.

Tail Hedging Is Not As Easy As You Think

Convexity can provide explosive payoffs from unlikely events. It’s a powerful weapon to wield, but like most weapons, it could be inefficient or even dangerous in the hands of the untrained.

DIY Trend-Following Allocations: April 2024

Full exposure to domestic equities. Full exposure to international equities. Full exposure to REITs. Partial exposure to commodities. Partial exposure to intermediate-term bonds.

Valuing Artificial Intelligence (AI) Stocks

While there is literature that describes the "domain" of artificial intelligence, there are very few, if any that analyze the valuation and pricing of AI stocks. The authors attempt to fill the void with a two part methodology.

Economic Momentum

Strong empirical evidence demonstrates that momentum (both cross-sectional and time-series) provides information on the cross-section of returns of many risk assets and has generated alpha relative to existing asset pricing models.

Options 101: Understanding Options Basics

Options have a bad reputation, and for good reason. After all, our friends at Wall Street Bets have taken over and turned the options market into a casino. But just like options can be used for gambling, they can also be used to structure risk and formulate payoffs that have the potential to reduce risk at the portfolio level. In fact, options are one of the best tools at our disposal to manage portfolio risk, if used correctly.

Personality Differences and Investment Decision-Making

This study offers valuable information to provide insights into the underlying mechanisms driving investment behavior. For example, recognizing the impact of Neuroticism on belief formation and risk perception can help explain why some investors exhibit greater aversion to stock market volatility. Similarly, understanding how Openness influences risk preferences can shed light on why certain individuals are more willing to take investment risks than others.

Tracking Error is a Feature, Not a Bug

The benefits of diversification are well known. In fact, it’s been called the only free lunch in investing. Investors who seek to benefit from diversification of the sources of risk and return of their portfolios must accept that adding unique sources of risk means that their portfolio will inevitably experience what is called tracking error—a financial term used as a measure of the performance of a portfolio relative to the performance of a benchmark, such as the S&P 500.

Short Campaigns by Hedge Funds

Our analysis highlights the importance of short campaigns for understanding the economic impact of activist hedge funds.

Breaking Bad Momentum Trends

In their two papers, Goulding, Harvey, and Mazzoleni showed that observed market corrections and rebounds carry predictive information about subsequent returns and showed how that information could be utilized to enhance the performance of trend-following strategies by dynamically blending slow and fast momentum strategies based on four-state cycle-conditional information.

Betting on a Short Squeeze as Investment Strategy

Short squeezes are often associated with a large positive jump in the price of a stock. Filippou, Garcia-Ares, and Zapatero demonstrated that skewness-seeking investors try to identify securities that could experience a short squeeze in the near future and are willing to pay a premium for them. That results in an overvaluation of the options and, on average, negative returns. Investors are best served to avoid investments with lottery-like distributions. One way to do that is to turn a blind eye to social media sites like Robinhood and Reddit so you don’t get caught up in the hype and excitement. That’s another example of why retail investors are called “dumb money.” Forewarned is forearmed.

Robo-advisors: A well-researched topic

Along with the rapid growth in the utilization of robo-advisors, there has been similar growth in academic interest about robo-advisors.   What is the current state and what are the main research streams in the literature?

DIY Trend-Following Allocations: March 2024

Full exposure to domestic equities. Full exposure to international equities. Partial exposure to REITs. No exposure to commodities. Partial exposure to intermediate-term bonds.

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