RESEARCH: FOR CURIOUS MINDS

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

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

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

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

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

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

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

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

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

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

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