RESEARCH: FOR CURIOUS MINDS

VOLATILITY HEDGE FUNDS: THE GOOD, THE BAD, AND THE UGLY 

• Volatility hedge funds provided attractive diversification benefits for equity portfolios
• However, long were preferable over short volatility strategies
• Some scepticism is required for the hedge fund index performance

GLOBAL MACRO: MASTERS OF THE UNIVERSE?

• The alpha of global macro funds has been shrinking consistently over time
• However, correlations to equities & bonds were low on average, offering diversification benefits
• Capital allocators have been cautious on the strategy in recent years

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