Factor allocation

Large Cap Analysis

23.December 2020

Every week, through these posts, we point to interesting academic research papers. This week´s blog is slightly different, yet no less engaging. This blog includes numerous interesting charts from more than hundred charts in the CUSTOM REPORT: U.S. LARGE INDEX by the PHILOSOPHICAL ECONOMICS using OSAM Research Database. The report consists of the visually presented analysis of the U.S. Large index. The analysis includes the composition, returns, individual stocks, sector and factor allocations, and six fundamentals. The report contains comprehensive information about the large caps in the U.S. market from 1963 to 2020 and is worthy of a look.

We wish you all Merry Christmas …

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The Active vs Passive: Smart Factors, Market Portfolio or Both?

11.December 2020

While there may be debates about passive and active investing, and even blogs about the numbers of active funds that were outperformed by the market, the history taught us that the outperformance of active or passive investing is cyclical. As a proxy for the active investing, the new Quantpedia’s research paper examines factor strategies and their smart allocation using fast or slow time-series momentum signals, the relative weights based on the strength of the signals and even blending the signals. While the performance can be significantly improved, using those smart approaches, the factors still got beaten by the market in both US and EAFE sample. However, the passive approach did not show to be superior. The factor strategies and market are significantly negatively correlated and impressively complement each other. The combined Smart Factors and market portfolio vastly outperforms both factors and market throughout the sample in both markets. With the combined approach, the ever-present market falls can be at least mitigated or profitable thanks to the factors.

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Implied Equity Duration as a Measure of Pandemic Shutdown Risk

14.August 2020

Some companies have relatively more of their value in near-term cash flow (for ex. General Motors Corporation). Others (for ex. Tesla), are growth stocks, with a greater proportion of their market value based on long-term expected future cash flow. It seems that coronavirus pandemic has hit mainly the first group, the “low equity duration” companies. A new academic research paper written by Dechow, Erhard, Sloan, and Soliman explains how the equity duration factor can be used to assess how are companies exposed to short-term unexpected macroeconomic events (like COVID-19 pandemic), and how equity duration sensitivity can also explain relative underperformance of value vs growth stocks during the last bear market.

Authors: Dechow, Patricia and Erhard, Ryan and Sloan, Richard G. and Soliman, Mark T.

Title: Implied Equity Duration: A Measure of Pandemic Shutdown Risk

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The Effectivity of Selected Crisis Hedge Strategies

30.July 2020

During past months we made a set of articles analyzing the performance of equity factors and selected systematic strategies during coronavirus crisis. These articles were short-ranged with data only from the start of the year 2020, which is enough for the purpose of the quick blog posts, but very short-sighted to see the nature of these strategies. Therefore, we expanded the time range by 20 years. For a better understanding of hedge possibilities of these strategies, we have added a comparison to essential safe-haven assets, not only to equities.

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Transaction Costs Optimization for Currency Factor Strategies

18.June 2020

A lot of backtests of systematic trading strategies omit transaction costs (in the form of spreads and fees). Simulation is then simpler, but resultant model portfolio and its performance can be misleading. In the case of currency factor investing, backtest without the tcosts simulation can pick currencies with wider spreads and higher volatilities. And in real trading, with real-world transaction costs, a strategy can, therefore, perform significantly worse than expected. A research paper written by Melvin, Pan, and Wikstrom offers an elegant optimization methodology to incorporate transaction costs into the backtesting process which allows strategies to retain their alpha …

Authors: Michael Melvin, Wenqiang Pan, Petra Wikstrom

Title: Retaining Alpha: The Effect of Trade Size and Rebalancing Frequency on FX Strategy Returns

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