RESEARCH

The objective of these mini-research reports is to analyse factor investing and trading strategies from a practical perspective and highlight issues that may not be significant for more rigid academic papers. They are kept brief, as simple as possible, and will hopefully stimulate debate.

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.

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.

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.

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