Browsing: CAPM / Alpha Theory

CAPM / Alpha Theory

Three Sources of Alpha: A Call for Small Manager Investment

Oct 13th, 2020 | Filed under: CAPM / Alpha Theory, Hedge Fund Strategies, CTA, Investing in Commodities, Equity Hedge Funds, Newly Added, Seeding/early-stage, Macro and Managed Futures Funds, Hedge Funds, Commodities, Finance & Economics

By Karl Rogers, ACE Capital Investments I recently finished a multi-strategy fund of hedge funds build for an institution where I focused on three sources of alpha: small manager, equities and commodities. Small Manager Alpha Given that “small” managers have been found to outperform their larger peers[1], why do manyRead More


The Case for Redefining the Risk-free Asset

Sep 13th, 2020 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

The quantitative analysis of markets, and of the performance of fund managers, is in large part the mathematical treatment of various (often contested) metrics of risk. Let us bring two points about risk into collision. First, over more than three decades scholars have debated the “equity premium puzzle.” Why doRead More


IS DOWNSIDE RISK PRICED IN CRYPTOCURRENCY MARKET?

Aug 23rd, 2020 | Filed under: CAPM / Alpha Theory, Newly Added, Risk management, Digital currencies, Risk Management Strategies & Processes, Emerging Alternative Investments, Finance & Economics

By Victoria Dobrynskaya, PhD, associate professor of Finance at National Research University Higher School of Economics Looking at the whole cryptocurrency market through the prism of standard multi-factor asset-pricing models reveals that there is a significant heterogeneity in the exposure to the downside market risk across coins, and that aRead More


Putting 2020 into Perspective: Diversification May Work Better than You Think

Aug 6th, 2020 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Risk management, Asset allocation, Asset Allocation Models, Alternative Investments in Context, Institutional Asset Management, Risk Management Strategies & Processes, Hedge Funds, Allocating to A.I.

By Rodney Sullivan, CFA, CAIA, Executive Director, University of Virginia Darden School of Business US recessions are typically accompanied by declines in stock market returns and, of course, 2020 has been no exception. We are once again reminded that investing is not easy leaving many investors to wonder how bestRead More


Peeling Back the Wrapper of Hedge Fund Strategies

Apr 13th, 2020 | Filed under: CAPM / Alpha Theory, Hedge Fund Strategies, Alpha & Beta, Equity Hedge Funds, Newly Added, Institutional Investing, Alpha Strategies, Event-Driven Hedge Funds, CAIA Alternative Viewpoints, Liquid Alts, Institutional Asset Management, Macro and Managed Futures Funds, Hedge Funds, Relative Value Hedge Funds, Liquid Alternative Investiments, Allocating to A.I., Other Topics in A.I.

By Aaron Filbeck, CAIA, CFA, CIPM, Associate Director, Content Development at CAIA Association During CAIA Association’s most recent Virtual Chapter event, Keith and I (virtually) sat down with Chris Tidmore, CFA, CPA at The Vanguard Group to discuss Vanguard’s recent whitepaper, “The Wrapper Matters: Comparing Liquid Alternatives to Hedge Funds”Read More


SHARE BUYBACKS OR COMPOSITE EQUITY ISSUANCE?

Jan 1st, 2020 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, The Global Economy & Currencies, Emerging markets, The A.I. Industry, Institutional Asset Management, Finance & Economics

By Daniel Fang, CFA, CAIA, Quantitative Research, and Diana Olteanu-Veerman, CFA, Quantitative Strategy, Northern Trust Asset Management Composite Equity Issuance (Cei) Can be a Proxy for Intangible Returns Anomalies Even though factor investing is widely supported in academia and investment practice, forecasting and harvesting factor returns remains challenging for various reasons.Read More


Pairs Trading Suggested for Energy Stocks

Dec 11th, 2019 | Filed under: CAPM / Alpha Theory, Hedge Fund Strategies, Alpha & Beta, Newly Added, Alpha Strategies, ETFs, The A.I. Industry, Hedge Funds, Allocating to A.I., Finance & Economics

Carlos Salas Najera, of the New York City Data Science Academy, has tested an old idea (pairs trading) for a strategy that could be tailored to energy stocks and related ETFs. The resulting paper is “Pairs Trading and VAR Analysis Applied to Energy Stocks.” His latest paper, though, has aRead More


The Persistence of the Low-Risk Effect

Oct 10th, 2019 | Filed under: CAPM / Alpha Theory, Hedge Fund Strategies, Financial Economics Theory, Newly Added, Alpha Strategies, The A.I. Industry, Hedge Funds, Finance & Economics

The “volatility effect,” also known as the “low-risk effect,” is the subject of a new paper from Robeco. The gist of the “effect” is this: low-risk stocks “should” show a lesser return than high-risk stocks. The Capital Asset Pricing Model predicts a linear relationship between the risk of a securityRead More


What Hedge Funds Do When the Lights Go Out

Aug 13th, 2019 | Filed under: CAPM / Alpha Theory, Equity Hedge Funds, Financial Economics Theory, Newly Added, The A.I. Industry, Hedge Funds, Finance & Economics

A new paper looks at how hedge funds adjust their information acquisition and trading behavior as analyst coverage changes—and more specifically, when certain stocks cease to be covered by certain analysts. These authors considered the hypothesis that, faced with a murkier environment, hedge funds might become more cautious, reducing theirRead More


Active Risk Budgeting Gets Consistent Alpha

Jul 28th, 2019 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Risk management, Risk Metrics and Measurement, The A.I. Industry, Risk Management Strategies & Processes, Risk Management & Operations, Finance & Economics

A new paper takes an experimental look at “Active Risk Budgeting,” a method of portfolio construction that looks to build upon older and sometimes passive risk budgeting approaches, adding enough active management to allow the risk budget to change over time. For example, an institution might want its risk budgetRead More


How Bayesians Solve the Markowitz Problem

Jan 13th, 2019 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Behavioral finance, The Global Economy & Currencies, Macroeconomics, Finance & Economics

Understanding of the “Markowitz problem” has changed in the 60+ years since Harry Markowitz’ publication of an article in the Journal of Finance that outlined the basics of modern portfolio theory. The problem is that portfolio theory requires an investor to estimate risk, return, and correlation from market data, meaningRead More


50 Years of Put-Call Parity

Nov 1st, 2018 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, The A.I. Industry, Finance & Economics

It will be 50 years ago next year (1969) that Hans R. Stoll came out with “The Relationship between Put and Call Option Prices,” establishing the principle of put-call parity. Stoll’s article in The Journal of Finance was a landmark in the developing scholarship about derivatives. It preceded the workRead More


A Brief History of Asset Allocation

Oct 16th, 2018 | Filed under: CAPM / Alpha Theory, Algorithmic and high-frequency trading, Hedge Fund Strategies, Financial Economics Theory, Newly Added, Risk management, Crowdfunding, Risk Metrics and Measurement, Business News, The A.I. Industry, Risk Management Strategies & Processes, Hedge Funds, Emerging Alternative Investments, Finance & Economics, Other Topics in A.I.

Glassbridge has put out an ambitious white paper about the “evolution of asset allocation across the investment management industry,” one that begins with the basics of the Capital Asset Pricing Model and ends with quantitative analysis and crowdsourcing. The premise is that new strategies, and new ranges of data, areRead More


Peeling the Onion of Equity Hedge Fund Alpha

Oct 4th, 2018 | Filed under: CAPM / Alpha Theory, Hedge Fund Strategies, Equity Hedge Funds, Financial Economics Theory, Newly Added, The A.I. Industry, Hedge Funds, Finance & Economics

The founder of CEO of MSR Indices, a Parsippany, N.J.-based index-investors consultancy, has authored a white paper on target volatility, also known as intertemporal risk parity. The gist of the paper is that: (1) equity hedge funds do secure alpha for their investors, obvious if one measures their performance againstRead More


What is Behind the Momentum Factor? Informed Trades?

Aug 5th, 2018 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

A new paper by four U.S. scholars makes a contribution to the literature on factors and the modeling of stock prices. The paper, “An Information Factor,” proposes in essence that the momentum factor isn’t what it seems to be. Ever since the publication of a 1993 paper by Jegadeesh andRead More


The View from Amundi: Absolute Return and Factor Models

Jun 10th, 2018 | Filed under: CAPM / Alpha Theory, Newly Added, Finance & Economics

On May 30, CAIA France sponsored a panel discussion on absolute return strategies, held at the headquarters of Amundi Asset Management, on the Boulevard Pasteur in Paris. Frederic Hoogveld, the head of investment specialists, index and smart beta for Amundi, spoke that evening on dynamic factor allocation. As a review:Read More


Revising the ICAPM to Reflect Effects of Style Investing

May 1st, 2018 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

A recent paper by Michael Stutzer, of the University of Colorado at Boulder, Leeds School of Business, suggests that the intertemporal version of the capital asset pricing model (ICAPM) needs some revision in light of the market dominance of style investors. A more full statement of that might be: itRead More


Funds Use Public Info to Complement Private Signals

Apr 12th, 2018 | Filed under: CAPM / Alpha Theory, Equity Hedge Funds, Financial Economics Theory, Newly Added, Event-Driven Hedge Funds, Hedge Funds, Finance & Economics

Alan D. Crane and two colleagues have written a paper on whether and how hedge funds profit from publicly available information, in particular from SEC filings. Crane is an assistant professor at Houston’s Rice University, Jesse H. Jones Graduate School of Business. He and two Rice students, Kevin Crotty andRead More


Finance Theory, Listed Equities, and Liquidity

Mar 29th, 2018 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

A recent paper from Robeco discusses whether a liquidity premium exists in the stock market. The authors, David Blitz, Jean-Paul van Brakel, and Milan Vidojevic, conclude that “the evidence for such a premium is, at best, weak.” Less politely, these authors refer to the whole notion of a liquidity premiumRead More


How Random is the Walk? Bond Market Empiricism

Jan 2nd, 2018 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Behavioral finance, Finance & Economics

A new paper, forthcoming in the Journal of Empirical Finance, looks at the corporate bond market, and looks specifically for behavioral biases. Although it finds some, it also finds that they are small, and can’t serve as the foundation for a profitable trading strategy. Though its route is roundabout, theRead More


Jacobs, Levy, and Markowitz on Portfolios

Aug 22nd, 2017 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

Bruce Jacobs and Kenneth Levy, the founders and Chief Investment Officers of Jacobs Levy Equity Management, have brought out a new and considerably thickened edition of their classic collection of articles on equity investment. This second edition of Equity Management contains all 15 articles from the original, and 24 ofRead More


Evidence that Sovereign Wealth Funds Mitigate the Agency Problem

May 21st, 2017 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

Ever since the 1930s, scholars have discussed the “agency problem” built into the structure of publicly owned corporations. This was a theme of Ronald Coase’s landmark article, “The nature of the firm” in 1937. Shareholders presumably want a company managed in a way that maximizes their – the shareholders’ –Read More


The Free Lunch of Diversification: Still on the Menu

Mar 28th, 2017 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

Anthony Davidow, vice president, alternative beta and asset allocation strategist, Charles Schwab, offers a valuable re-examination of modern portfolio theory in an article for Investments & Wealth Monitor. Davidow begins at the beginning. Harry Markowitz called diversification “the only free lunch in finance.” The idea is that by diversifying, anRead More


The Low Volatility Anomaly: Gunpowder Inc.

Feb 26th, 2017 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Hedge Funds, Structure of the Hedge Funds Industry, Finance & Economics

In a new paper David Blitz, the head of quantitative strategies for Robeco Asset Management, crunches numbers and reaches a surprising conclusion, precisely contrary to an intuitively appealing theory about the low volatility anomaly.  But … let’s begin from the beginning. Standard financial economic theory holds that investors are compensatedRead More


Earnings Releases & Social Media: Listening to the Crowd

Feb 16th, 2017 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

Earnings releases, and the “seasons” made up out of them, have become almost a comforting ritual in the investment world. The days leading up to a company’s release often incites a good deal of more or less well-informed guesswork. That guesswork may become significantly more informed through crowdsourcing. That isRead More


Active Share: Empirical and Conceptual Issues

Jan 17th, 2017 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Finance & Economics

In 2009, Martijn Cremers, of the University of Notre Dame, and Antti Petajisto of New York University, introduced a new portfolio measurement they called Active Share, measuring in percentage terms the deviation of a portfolio from its benchmark (deviation in holdings, not in performance). Thus, a portfolio with 100% activeRead More


Funds of Funds and the Task of Financial Intermediation

Jan 12th, 2017 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Venture capital, Private Investments, Finance & Economics

Are funds of funds a valuable form of intermediation? Robert Harris, of the University of Virginia, Darden School of Business, and three other distinguished scholars looked at this question in a Darden Business School Working Paper, and they decided that, at least with regard specifically to the role of FOFsRead More


Rudin and Marr: A Reformulation of RP Methods of Portfolio Construction

Nov 24th, 2016 | Filed under: CAPM / Alpha Theory, Newly Added, Finance & Economics

A recent article by Alexander Rudin and William M. Marr, in The Journal of Alternative Investments, seeks to change the terms of discussion of the risk parity method of portfolio construction in a way that might remove some of the counter-intuitive consequences that can dog the approach. The paper, “InvestorRead More


Infrastructure: Look at the Contracts–Not the Industry or the Index

Jul 10th, 2016 | Filed under: CAPM / Alpha Theory, Infrastructure, Financial Economics Theory, Newly Added, Operationally Intensive Real Assets, Real Assets, Finance & Economics

A new paper from EDHEC Infrastructure Institute decides that there is no such thing as a listed infrastructure asset class. What is the practical significance of that inference?  It means that for investors (individual or institutional) looking to diversify their portfolio properly, a dedicated index focused on a listed infrastructureRead More


A Review of the Commodity Index/Global Hunger Controversy

May 24th, 2016 | Filed under: CAPM / Alpha Theory, Investing in Commodities, Financial Economics Theory, Newly Added, Commodities, Finance & Economics

The consensus in market scholarship seems to be not only that “still waters run deep” but that deep waters run still. The greater the depth of volume in a commodity, the lesser the volatility of that commodity’s price. (This of course requires the usual “other things being equal” caveat.) ThisRead More


The Value of a Proxy Access Mandate: Part Two

Apr 19th, 2016 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, Financial Economics Theory, Newly Added, Hedge Funds, Structure of the Hedge Funds Industry, Finance & Economics

This is the conclusion of a two-part series on the issue of the value of a proxy access mandate. In the first part we looked specifically at a study the CFA Institute made public two years ago, one that has of late received renewed attention. It relied upon four scholarlyRead More


The Value of a Proxy Access Mandate: Part One

Apr 17th, 2016 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, Newly Added, Hedge Funds, Structure of the Hedge Funds Industry, Finance & Economics

This begins a two-part discussion of the issue of the value of a proxy access mandate. The question is an important one. It is prima facie wrong to create any new rule (whether it’s a corporate bylaw, a regulatory edict, an act of a legislature or anything else) unless thereRead More


Smart Beta Strategy: Aces Australian Scrutiny

Jan 10th, 2016 | Filed under: CAPM / Alpha Theory, Alpha & Beta, Financial Economics Theory, Newly Added, Alternative Beta & Hedge Fund Replication, Smart Beta, Allocating to A.I., Finance & Economics, Other Topics in A.I.

Paul Docherty, a senior lecturer at Newcastle Business School. University of Newcastle, in Australia, has studied the performance of the factors that underlie smart beta portfolios within the equity markets of that country. On the basis of a long time-series of data, Docherty has concluded that four such factors “allRead More


Arbitrage Pricing Theory and Large Pricing Errors

Dec 13th, 2015 | Filed under: CAPM / Alpha Theory, Portable Alpha & Alpha/Beta Separation, Hedge Fund Operations and Risk Management, Alpha & Beta, Financial Economics Theory, Newly Added, Risk Management Strategies & Processes, Risk Management & Operations, Allocating to A.I., Finance & Economics

Uppal and Zaffaroni use Arbitrage Pricing Theory as a meta-model: a model that can be employed to check the errors in the specification of first-order models that in turn are used to value assets.Read More


A Fresh Look at Bubbles: Revising Assumptions

Sep 16th, 2015 | Filed under: CAPM / Alpha Theory, Derivatives

If it is possible for bubbles to arise in frictionless circumstances, then it follows that any theory that treats bubbles as the consequence of friction is, at very best, incomplete. And that is important to know especially if policy makers are busy drawing their own conclusions from those incomplete-or-worse theories. Read More


Supreme Court Decisions: Post-Announcement Hours & Days

Sep 10th, 2015 | Filed under: CAPM / Alpha Theory, Hedge Fund Strategies, Alpha Hunters, Alpha Strategies, Legislation/Court rulings, Alpha Seekers

Presumably the U.S. Supreme Court's decision, in December 2008, that states can in fact make and enforce tougher labeling standards for cigarettes than does the federal government was a negative for tobacco stocks. But did that mean that stock prices had already anticipated the decision before it happened? or that they immediately adjusted downward on the morning the decision was announced? Or ... neither of those? Read More


Billion Dollar Claim from Black Swan Fund: Not from Taleb

Sep 7th, 2015 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics

As regular readers of this blog may recall, I have found much to admire in the writings of Nassim Nicholas Taleb. So I am happy that he had decided to put some distance between himself and a recent claim that Universa made $1 billion when bad news from China shook the world's markets in late August. Read More


Crisis? Tempted to Flee to Shelter of Big Funds? Bad Idea

Jul 29th, 2015 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, Hedge Fund Strategies, Institutional Investing, Alpha Hunters, Alpha Strategies, Behavioral finance

The authors of a new study of the relationship between fund size and performance employ a database consisting of 7,261 funds and their performance over a twenty year period (1994 to 2014). Spoiler alert: size is bad. Especially in a crisis.Read More


A New Look at Last Year’s Conference Board White Paper on Governance

Jul 27th, 2015 | Filed under: CAPM / Alpha Theory

Last year the Conference Board asked itself several questions germane to corporate governance. They were good questions. The odd thing about the report was the way the greybeards involved simply threw up their hands rather than trying to answer any of them. Read More


European Investor Satisfaction with Smart Beta ETFs

Jun 28th, 2015 | Filed under: CAPM / Alpha Theory, Alpha Strategies, Risk management, Liquid Alts, ETFs, Smart Beta

Two authors at EDHEC remind us that 15% of the assets in any ETF or ETF-like products for European investors were in smart-beta indexed products as of August 2014, and that this amount is growing. They discuss the extent to which investors are pleased with their results. Read More


Lies, Damned Lies and Alpha

May 21st, 2015 | Filed under: CAPM / Alpha Theory, Alpha Hunters, Alpha Strategies

Guest columnist Andrew Beer looks at alpha.Read More


Study: Corporate/Government Cronyism Does Create Alpha

May 3rd, 2015 | Filed under: CAPM / Alpha Theory, Indexes

A new report finds that firms where current public officials are destined to become employees outperform other private firms by 7.43% per year during the three years before the officials/employees pass from one post to the other. The outperformance is highest in the year immediately before the switch, Justas a cynic looking for corrupt quid pro quos would suspect. Read More


They Do It Right Down Under: Australian Institutional Funds

Apr 14th, 2015 | Filed under: CAPM / Alpha Theory, Institutional Investing, Alpha Hunters, Alpha Strategies, Indexes, Alpha Seekers, ETFs

The hapless U.S. mutual funds Chen and Gallagher sample have a nominally positive pre fee alpha only when measured against CAPM. That disappears into the negatives when the baseline used is the Fama-French model, and deeper into the negatives when the momentum factor is added. Read More


EDHEC: Smart Beta Indexes May Be On a Launch Pad

Apr 6th, 2015 | Filed under: CAPM / Alpha Theory, Risk management, ETFs

There have been "a considerable number of product launches in the area of smart beta ETFs," but investors are eager for more, perhaps in the hope the developers will get beyond the "few popular strategies" in that area on which they have so far focused. With more variety may come a real take-off. Read More


Intraday Momentum Confirmed: Day Traders Credited

Mar 24th, 2015 | Filed under: CAPM / Alpha Theory, Derivatives, Behavioral finance, ETFs

The first half-hour return of the S&P 500 ETF predicts the last half-hour return of the same trading day rather well. Why isn't this effect arbitraged away and a random walk restored? Read More


Debates Over Bayesianism Take Cartoon Form

Feb 10th, 2015 | Filed under: CAPM / Alpha Theory, Risk management, Technology

Regular readers of AllAboutAlpha know that Bayesianism, a movement with the world of probability and statistics, has a good deal to do with contemporary pricing models and portfolio theory. It also has foes in that world, the frequentists, and a 2012 cartoon, recently raised to salience again by a Facebook post, has given those frequentists reason to gripe about Bayesian smugness. Read More


If You’re So Smart, Why Aren’t You Rich?

Jan 14th, 2015 | Filed under: CAPM / Alpha Theory, Algorithmic and high-frequency trading

A new paper by a senior market economist at BNP Paribas celebrates the invention of Learning Vector Quantization (LVQ), a machine-learning algorithm that could enable some smart economists to get very rich indeed. Read More


Low-Vol Anomaly Provokes Reflections on an Old Adage

Jan 11th, 2015 | Filed under: CAPM / Alpha Theory, Indexes, Risk management

A new paper by Eric Falkenstein discusses an old question: the reason for the high risk-adjusted return in low-risk equities, and the adjustments it requires in CAPM. This is no fleeting oddity, but a lasting characteristic of markets. In econo-speak, not only the existence but the persistence of the anomaly requires explanation.Read More


The Best Offense is a Good Defense: Profiting from Hedging

Dec 3rd, 2014 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics, Risk management, Asset allocation

A regime switching model may treat a high-volatility environment as one “regime,” and a low-vol environment as its successor regime. The idea, as it applies to risk management, then, is simply to be ready in either setting for the switch to the other. This is both playing defense and playing offense. It is both managing risk and pursuing alpha. Read More


Hedge vs. Mutual Funds and the ‘Timing of Information Acquisition’

Oct 28th, 2014 | Filed under: CAPM / Alpha Theory, Behavioral finance

A new paper by a scholar at the McCombs School of Business looks at what causes what on Wall Street, starting with how (if at all) analyst downgrades cause price declines. Read More