RESEARCH: FOR CURIOUS MINDS

THE VARIANCE RISK PREMIUM: WHAT PREMIUM?

  • Harvesting the variance risk premium has a sound theoretical foundation
  • However, actual investment products have generated poor returns
  • Furthermore, they are correlated to equities, providing few diversification benefits

TACTICAL ETFS: TACTFULLY NO, THANK YOU?

  • Tactical investing aims to deliver better risk-adjusted returns and/or reduced drawdowns
  • Tactical ETFs have not achieved either objective in recent years
  • It is challenging to explain the consistent underperformance across different types of tactical ETFs

MERGER ARBITRAGE: ARBITRAGED AWAY?

  • As AUM in merger arbitrage has increased, alpha decreased
  • Investors can access merger arbitrage via hedge funds, bank indices, and ETFs
  • The strategy is not as uncorrelated from equities as likely perceived by allocators

TAIL RISK HEDGE FUNDS

  • Tail risk funds tend to be most in demand when they are least attractive
  • Short-term bonds provided similar benefits to tail risk funds
  • The TAIL ETF closely replicates the performance of tail risk funds

THOU SHALL NOT SHORT THE VIX

  • The VIX has not remained at high levels for long in recent times, theoretically making a mean-reversion strategy attractive
  • However, there were periods historically where volatility stayed elevated for years
  • Furthermore, the VIX is not a tradeable index and related products should be viewed with caution

THEMATIC INVESTING: THEMATICALLY WRONG?

  • Thematic investing can be viewed as performance chasing with a narrative
  • A systematic approach to thematic investing would have underperformed the stock market
  • Thematic hedge fund managers have not generated attractive returns

VENTURE CAPITAL: WORTH VENTURING INTO?

  • Venture capital returns are likely to be overstated
  • Top-performing VC funds generated attractive returns, but are difficult to access
  • Average venture capital returns can be replicated efficiently with public equities

PRIVATE EQUITY: FOOLING SOME PEOPLE ALL THE TIME?

  • Private equity return data should be viewed with caution
  • Returns are likely overstated while volatility is understated
  • Private equity returns are highly correlated to public equities

DO ACTIVIST INVESTORS CREATE VALUE?

  • Shareholder activism has not grown from a campaign or AUM perspective recently
  • Activist funds have not generated attractive returns
  • The lack of outperformance is challenging to explain   

EQUITY VS BOND INDICES

  • Bond indices are frequently portrayed as featuring a lower quality composition than equity indices
  • Analysing equity and bond indices in the US and emerging markets confirms this view
  • Perhaps this explains why there is some alpha generation in fixed income   

THE CASE AGAINST REITS

  • Real estate stocks featured moderate correlations to stock markets over the last 30 years
  • However, diversification benefits for equity portfolios were only marginal
  • Other strategies provide similar yield and downside protection characteristics

AI, WHAT HAVE YOU DONE FOR ME LATELY?

  • AI-focused companies have underperformed markets
  • AI-powered ETFs have generated unimpressive returns
  • In contrast, AI-powered hedge funds easily beat their benchmark, but the performance can be challenged

HEDGING VIA MANAGED FUTURES LIQUID ALTS

  • Managed futures strategies provided attractive diversification benefits during the financial crisis
  • The strategies have become available as mutual funds and ETFs
  • Mutual funds provide the same exposure as private vehicles, ETFs do not

INDEXING: OUT WITH TRADITION?

  • Equal and fundamentally weighted equity indices outperformed market cap weighted in the US since 1990
  • The higher returns are explained by exposure to Value and Size factors
  • The outperformance is not consistent across time given factor cyclicality

A HORSE RACE OF LIQUID ALTERNATIVES

  • Investors can access alternative strategies via mutual funds and ETFs
  • Most of these show moderate to high correlations to equities, which is concerning
  • Bonds would have been a better diversifier in recent years

HEDGE FUND ETFS

  • Core hedge fund strategies are available as low-cost and transparent ETFs
  • The performance of hedge fund ETFs has been comparable to that of their benchmarks
  • ETFs have only captured 1% of hedge fund assets

OPTION-BASED STRATEGIES: OPT IN OR OPT OUT?

  • Option-based strategies generated better risk-adjusted returns than the S&P 500 over the last 30 years
  • Investors should be wary of buying options and focus on harvesting the volatility risk premium by writing options
  • Option-based strategies are an interesting alternative to long-short equity hedge funds for reducing risk

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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