Intangibles and the Performance of the Value Factor
Systematic factor-driven value strategies have underperformed broad market indices (such as the S&P 500) over the past 15+ years. That has led many to question [...]
Private Equity Versus Public Equity Returns
Cliffwater found that private equity allocations by state pensions produced a 11.0% net-of-fee annualized return over the 23-year period ending June 30, 2023. Over the same period the CRSP 1-10 Index (U.S. total market) returned 7.2% and the MSCI All Country World ex USA Index returned 4.4%.
Calendar Anomalies, Much Ado About Nothing
An anomaly is a pattern in stock returns that deviates from what is expected based on established financial theories or models. These patterns can sometimes [...]
Improving Low Volatility Strategies
The bottom line is that returns to the low volatility anomaly have only justified investing when low-volatility stocks were in the value regime, after periods of strong market performance, and when they excluded high-volatility stocks that have low short interest (providing clues as to how to improve its performance). This may be why live funds have been generating large negative alphas once we account for common factor exposures.
The Explosive Growth of Private Credit: Is There a Bubble?
The growth rate of private credit has been so rapid (growing to nearly $2 trillion by the end of 2023, roughly ten times larger than it was in 2009), that concerns about there being a bubble have been raised.
Markets Becoming More Efficient: The Disappearing Index Effect
Greenwood and Sammon’s findings of a disappearing index effect provides further support for the findings of McLean and Pontiff, Does Academic Research Destroy Stock Return Predictability? 2016. Once anomalies are well recognized by the market they decline and may even disappear, though limits to arbitrage can allow them to persist. Their findings also provide support for Andrew Lo’s The Adaptive Markets Hypothesis (2004). The bottom line is that markets are becoming more efficient, raising the hurdles for active managers to generate alpha.
Using Trading Volume to Optimize Portfolio Construction and Implementation
The authors of the research discussed developed a machine learning model that can accurately predict trading volume for individual stocks. They then demonstrated how this model can be used to construct a portfolio that outperforms a traditional market-cap weighted portfolio.
Academic Anomalies Formed After Information Events
The hurdles to adding alpha for active managers are getting higher—investment practitioners make use of it as soon as or shortly after it is available.
The Sahm Rule as a Recession Indicator
Because the Sahm rule focuses solely on the unemployment rate, caution is warranted before assuming it is signaling a recession.
The Hidden Cost of Index Replication
An index-tracking approach generally lacks flexibility, which detracts from performance, leaving returns on the table. Intelligent design can overcome such issues. For example, an S&P 500 Index could choose to rebalance one month ahead of the scheduled reconstitution, minimizing the impact of reconstitution. Direct index funds are already engaging in such strategies with ETFs.
Can Skewness Identify Future Outperforming Mutual Funds
While the skewness metric did demonstrate that it could select funds with managers skilled a security selection, the fund’s expenses and implementation meant that the fund was just about able to cover its expenses, and that was before the negative impact of active management on after-tax returns—and the finding was not statistically significant at even the 10% level of confidence.
Adding Leveraged, Long-Short Factor Strategies to Improve Tax Alpha
Joseph Liberman, Stanley Krasner, Nathan Sosner, and Pedro Freitas, authors of the September 2023 study “Beyond Direct Indexing: Dynamic Direct Long-Short Investing,” examined if the utilization of leverage and long-short strategies motivated by the literature on factor-based investing could improve on the tax benefits of direct indexing and tax-loss harvesting.
The After-Fee Performance of Private Debt
Private debt funds are a rapidly growing segment of the private capital market. Isil Erel, Thomas Flanagan, and Michael Weisbach, authors of the April 2024 [...]
Evergreen Private Equity Funds Attracting Assets
Evergreen funds are a relatively new concept in the private equity (PE) world compared to traditional closed-end funds. They were introduced to address the negatives of the traditional way to invest in private equity which had been in the form of partnerships.
The Effect of ESG Strategies on Global Equity Returns
To determine the impact of sustainable investment strategies on equity returns, Romulo Alves, Philipp Krueger, and Mathijs van Dijk analyzed the relationship between ESG ratings and global stock returns. They found very little evidence that ESG ratings were related to global stock returns over the two-decade period.
Overvalued or New Paradigm?
Without question the topic of greatest debate among investors, including investment professionals, and financial economists, is whether or not the market, and the technology sector in particular, is overvalued. There are two very strong conflicting views regarding not only the current valuation of technology stocks, but also the valuation of the entire asset class of large-cap growth stocks. One side, I’ll call the “new paradigm” or “it’s different this time” school. The other side, I’ll call “the been there, done that” school. Its theme is those that don’t learn from the past are doomed to repeat the same mistakes. No two sides could have more different viewpoints. To understand each side, let’s imagine a dialogue between the two schools.
The Value of WallStreetBets Investment Research Recommendations
Wallstreetbets has become an increasingly prominent source of investment research. Do their recommendations have value?
The Negative Impact of Crowding on Active Fund Performance
The shrinking pool of public companies across which active funds can diversify their holdings, increases the risk of crowding, which the research we reviewed shows negatively impacts performance. That provides yet another reason for investors to choose to avoid playing the loser’s game of active management.
The Impact of Amortizing Volatility across Private Investments
The amortization of volatility should be of concern for private capital asset classes. In order to properly budget for beta risks, it is critical that investors in private assets understand the amount of systemic (beta) risk that will “wash” into their private portfolios.
Explaining the Performance of Low-Priced Stocks: The Penny Stock Anomaly
An efficient way to improve the expected performance of an equity strategy would be to systematically exclude penny stocks, as well with high asset growth and extreme past returns, especially if they have low profitability (and exclude funds that don’t screen out such stocks).