Good Carry, Bad Carry Bekaert and Panayotov A version of the paper can be found here. Want a summary of academic papers with alpha? Check out our Academic Research Recap Category. Abstract: We distinguish between "good" and [...]
Due to a surge of interest from our "Long Cheap; Short Expensive. Buyer Beware" post, we decided to analyze the impact of changing the net exposure of the Magic Formula Long/Short portfolio (and of course, the impact on returns). [...]
We investigate various methods to express a 10-Year Treasury Bond allocation. The primary issue with Treasury Bonds is their lack of tax-efficiency. T-bond income (and CPI adjustments in the case of TIPS) are taxed as [...]
A friend of the blog was inspired by our Robust Asset Allocation discussion, and conducted some backtests using our proposed risk management framework: 50% simple moving average rule (MA) 50% time series momentum rule (TSMOM) For naming [...]
Trading on Noise: Moving Average Trading Heuristics and Private Investors Etheber, Hackethal and Meyer A version of the paper can be found here. Want a summary of academic papers with alpha? Check out our Academic Research Recap [...]
We were recently passed along an article suggesting that valuation spreads, or the spread in a valuation metric across the most expensive and least expensive stocks, matters for timing investments. We take this concept one step further [...]
Investors are enamored with various investment houses and personalities who claim insight into the prospects for long-term expected market returns. Some classic examples include Nouriel Roubini, John Hussman, David Rosenberg, or Jeremy Grantham. All really smart people. But have you ever asked "How" these folks came to their conclusions? In most cases, the answer is probably "No" and the reason is because there is a lack of transparency from the author(s) and/or a lack of knowledge/understanding on behalf of the reader. We also want to highlight that one can develop incredibly complex return forecasting models -- super sexy, super interesting, super compelling, etc. -- but that still doesn't mean they are any good at forecasting much of anything.
In our last post, we looked at tactical allocation using valuation metrics and trend-following measures. Our conclusion from the analysis is that discerning robust trading signals based on market valuations is difficult at best. This [...]
Aaron Seager, a portfolio manager at Arbor Hill Advisors, offered up the following charts showing alpha over the past 15 years for Warren Buffett and an index of Hedge Funds. Humbling to say the least... Warren [...]
The Impact of Cash Flow on Asset Allocation Decisions Guest Post: Chris Scott Investors trying to make decisions on how to invest their savings face many complications that are frequently ignored in research papers on [...]
Many consider smart beta to be a revolution in the asset management industry. For example, Bloomberg ran an article, "Funds Run by Robots Now Accounts for $400 Billion," which caught our attention. According to this article, "Smart beta," is [...]
Tactical asset allocation is always a hot topic in the blogosphere. A few fun concepts that hit the wires in 2014: GestaltU had an interesting series on Dynamic asset allocation. Gary Antonacci released his book on [...]
Strategy Summary The flexible asset allocation strategy was first proposed by Keller and Putten (2012), in their paper "Generalized Momentum and Flexible Asset Allocation (FAA): An Heuristic Approach". The flexible asset allocation strategy, hereafter, FAA, incorporates [...]
Ilya Kipnis is the author of QuantStrat TradeR. We like the work he does on his blog and his willingness to share his source code on various algorithms with the public. We asked Ilya if he'd [...]
Investors are probably unaware of the price they are paying for the "active" piece of Smart Beta. Using a simple framework, we show that buying a Smart Beta product at 45bps is equivalent to paying 5bps for a generic passive exposure and 138.33 bps for the active exposure! How many investors are aware that "low-cost" smart beta products might be implicitly charging fees that are equivalent to many active mutual fund fees?
Jason Zweig's book, "Your Money and Your Brain" highlights an interesting conversation with Harry Markowitz. Dr. Markowitz is a Nobel Prize winner and his work on mean-variance-analysis laid the foundation for all of modern portfolio [...]
Many of you have asked for the slides I presented at the ETF conference on tactical asset allocation. Note, the 2nd slide is an animation slide that doesn't translate to PDF. Slides are below: https://alphaarchitect.com/wp-content/uploads/2014/09/Asset_Allocation_Facts_and_Fiction_v03.pdf
Simple and Effective Market Timing with Tactical Asset Allocation Lewis A. Glenn A version of the paper can be found here. Want a summary of academic papers with alpha? Check out our Academic Research Recap [...]
The blogosphere is spammed with commentary related to the current high market valuations and the inevitable crash that "must" ensue. We've even been involved in the conversation at different points, trying to add some depth [...]
In this post we explore the trade-off between diversification and alpha generation. Here is a high level summary of the situation: Owning more stocks in a portfolio lowers "idiosyncratic" risk, or risk that can be eliminated through diversification...however...Owning more stocks dilutes performance of an "alpha" generating process. (e.g., forcing Warren Buffett to hold a 500 stock equal-weighted portfolio would dampen his alpha). In summary, fewer stocks in a portfolio imply more expected alpha and more idiosyncratic risk; more stocks in a portfolio imply less expected alpha and less idiosyncratic risk. But what is the optimal trade-off between alpha and idiosyncratic risk? Do we want to own a 1 stock portfolio? A 50 stock portfolio? A 1000 stock portfolio?