Browsing: Financial Economics Theory

Behavioural Finance
Market Efficiency

Financial Economics Theory

A Long-Dead Mathematician and Some Very Lively Problems

Apr 23rd, 2013 | Filed under: CAPM / Alpha Theory

D.J. Johnstone of the University of Sydney Business School tells us that if we understand Bayesian probability theory, we'll see that even a very informative signal can bring an increase in uncertainty, thereby raising the cost of capital. This is at least a little bit counter-intuitive, offending the verities about how wonderful is transparency. Read More

Time Flies and Statistics Lag: Thoughts on Factors

Aug 14th, 2012 | Filed under: Behavioral finance

Clifford Asness and Andrea Frazzini show that an important detail in the way scholars go about studying factor pricing and behavioral finance is seriously flawed. The detail in question dates to an influential paper by Eugene Fama and Kenneth French, "The Cross-Section of Expected Stock Returns," (1992). Read More

Efficiency May Be Special Case of Adaptation

Apr 24th, 2012 | Filed under: Hedge Fund Strategies, Alpha Strategies, Behavioral finance

In a new paper, Andrew Lo has educed from his Adaptive Markets Hypothesis five practical conclusions, among them that during times of crisis, the usual positive relationship between risk and return may not hold. There is in general a "time-varying and often negative relationship between the two." Read More

Sibling Rivals: CAPM versus The Risk Parity Portfolio

Aug 16th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, Performance, Analytics & Metrics, Hedge Fund Operations and Risk Management, Institutional Investing

By Christopher Faille A presentation by Samuel Kunz, chief investment officer of the Policeman’s Annuity and Benefit Fund, Chicago, to the CFA Institute 2011 Asset and Risk Allocation conference addressed the pros and cons of “risk parity.”  His presentation makes it seem that risk-parity portfolios (RPP) and the Capital AssetRead More

How well does your hedge fund hedge?

Jul 5th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Operations and Risk Management

A perfectly "hedged" fund is one which has no downside risk. Its payoff relative to the market or some other benchmark is the same as that of the fund plus a put option that provides protection against the downside. In the real world...Read More

Alpha not “dead” – just not always better than beta (as long as you’re sure about the future direction of markets of course)

May 1st, 2011 | Filed under: CAPM / Alpha Theory

A recent research note concludes that alpha (as a performance measure) passed away recently after along battle with beta-tosis and several other ailments. But wait! Did Alpha's nose just twitch?Read More

The Interaction of Demand and Supply Curves for Alpha

Apr 20th, 2011 | Filed under: CAPM / Alpha Theory

If only the marketplace for alpha fit neatly into a model from an Economics textbook.Read More

New spin on the Fundamental Law of Active Management finds US mutual funds were “a victim of their own success”

Mar 31st, 2011 | Filed under: CAPM / Alpha Theory, Real Estate

Finally, a version of the Fundamental Law that fundamental managers can actually use. But be forewarned, if you're a fundamental mutual fund manager, you won't like what it has to say... Read More

The “Most Diversified Portfolio”

Mar 27th, 2011 | Filed under: CAPM / Alpha Theory

Think your basket of thousands of stocks is the most diversified portfolio possible? Maybe not...Read More

Study finds that factor timing isn’t actually a huge source of hedge fund alpha

Mar 16th, 2011 | Filed under: CAPM / Alpha Theory

In the never-ending search for the source of hedge fund alpha, some have looked to factor timing. But a new study suggests that this, like many other possible explanations, falls short of explaining the hedge fund secret sauce.Read More

Managers operating in mature and “efficient” markets rejoice! Study finds you too can generate alpha.

Feb 22nd, 2011 | Filed under: CAPM / Alpha Theory

Thought managers in "inefficient markets" like emerging markets or small cap equities had the advantage when it comes to alpha-generation? Maybe not...Read More

Institutional ownership nears all-time highs. Good or bad for alpha-seekers?

Feb 2nd, 2011 | Filed under: CAPM / Alpha Theory

If a recent study of French institutional investors can be applied to a recent report on US equity markets, alpha opportunities abound for years to come.Read More

Study finds private equity “four-peats” can be more difficult than previously thought

Jan 19th, 2011 | Filed under: CAPM / Alpha Theory

Success breeds success – and expectations of continued success. Except in private equity, where success bodes reversion to the mean, a recent study on performance persistence argues.Read More

Pop Quiz for Long/Short Equity Investors: When does a high “up-capture” not cost you a commensurately high “down-capture”?

Dec 7th, 2010 | Filed under: CAPM / Alpha Theory

The dream long/short equity fund is one that has a high market "up-capture" with little or no market "down-capture". But how do you find your dream fund when up-capture and down-capture fluctuate all the time? Here's one innovative idea... Read More

Finding money where there’s no liquidity

Nov 17th, 2010 | Filed under: CAPM / Alpha Theory

Retail and high net worth investors can now gain access to hedge funds through a number of more liquid vehicles. But is their liquidity one of the very reasons their performance may be lower? Read More

Hubbert’s Peak: Is the world running out of “cheap alpha?” If so, here’s an idea…

Nov 12th, 2010 | Filed under: CAPM / Alpha Theory

The search for alpha is much like the search for oil, prompting us to muse a few years ago about whether there was going to be a Hubbert’s Peak in alpha. But regardless of whether the world is running out of “cheap alpha,” the process of refining crude returns intoRead More

Stock-picking alpha in a life or death struggle?

Oct 31st, 2010 | Filed under: CAPM / Alpha Theory

With stock dispersion at all-time lows, is the art of stock-picking dead or just napping? Read More

Downer for hedge fund managers: Apparently you have no skill, talent or alpha

Oct 6th, 2010 | Filed under: CAPM / Alpha Theory

A recent academic study finds that hedge fund managers has "zero" ability to put their market timing skills to proper use and produce alpha. Read More

Modern Portfolio Theory: Break free dude!

Aug 12th, 2010 | Filed under: CAPM / Alpha Theory

Modern portfolio theory, the hallmark of institutional investing, isn't so modern anymore, according to a new report by State Street that encourages embracing new types of risk models and investment options.Read More

New factor on the block: Research suggests you don’t need alternative investments to get an “illiquidity premium”

Aug 2nd, 2010 | Filed under: CAPM / Alpha Theory

Move over "momentum factor", there's a new kid in town and it's one that is familiar to the alternative investment industry. Read More

Study finds market “under-reaction” to Buffett’s 13F filings, proposes trading strategy to exploit it

Jul 28th, 2010 | Filed under: CAPM / Alpha Theory

In an age where hair-trigger investors exploit information in nanoseconds, here's a trade you can apparently take your sweet time to make.Read More

Capturing Political Alpha

May 23rd, 2010 | Filed under: CAPM / Alpha Theory

Here's another reason to count domestic and geopolitics as betas.Read More

When is alpha not really “alpha”? When it’s “beta-alpha.”

May 12th, 2010 | Filed under: CAPM / Alpha Theory

A paper by a pair of institutional investment consultants challenges the notion of a "stock-picker's market" and finds that "beta-alpha" is the real source of returns - at least for US large cap managers. Read More

What NASCAR Can Teach Us About Return Persistence

Apr 28th, 2010 | Filed under: CAPM / Alpha Theory

At the very least, NASCAR and Formula One share two things in common with the alternative asset management industry...Read More

The Five Faces of Alpha (II): “True” alpha reveals itself

Apr 7th, 2010 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends

Today we bring you part 2 of Erik Einertson’s special to “The Five face of Alpha”  (first installment here)… Alpha #2: Insurance Beta The second type of “Alpha” often found in the market can be referred to as insurance beta or Informationless Investing (Weisman 2002). This type of exposureRead More

The Five Faces of Alpha

Apr 6th, 2010 | Filed under: CAPM / Alpha Theory

As we have noted over the past several years, alpha is notoriously difficult to define and isolate since its existence depends not only on the target being observed, but on the perspective of its observer.  The more we study alpha, it seems, the less we know about it. We areRead More

Examining “Real Alpha” and “Exotic Beta” in mutual funds

Feb 1st, 2010 | Filed under: CAPM / Alpha Theory, Retail Investing

Usually the term "exotic beta" is associated with hedge funds. Finally, it's being applied to the largest pool of active management - mutual funds. Read More

New study of mutual fund alpha shows that what-goes-around-comes-around

Jan 27th, 2010 | Filed under: CAPM / Alpha Theory

A study of the variables driving mutual fund alpha also reveals something about the changing nature of markets themselves. Read More

Why bother separating alpha and beta? Here’s why.

Nov 8th, 2009 | Filed under: CAPM / Alpha Theory

With the un-alpha-like performance of the hedge fund portion of portable alpha strategies last year, it's easy to disregard alpha/beta separation as hype. But here's a must-read paper that shows why the concept is fundamentally sound.Read More

One reason why equity allocations may never fully recover from recent injuries

Oct 28th, 2009 | Filed under: CAPM / Alpha Theory

Institutional equity allocations have dropped along with the markets over the past 2 years. But even as the market rebounds, there may be some fundamental reasons why institutional investors will throw in the towel on "60/40" for good this time around.Read More

Active management redeemed?

Oct 5th, 2009 | Filed under: CAPM / Alpha Theory

A plethora of studies have shown that, on average, active management doesn't pay. But so many "active" funds are just closet indexers. So what happens when you analyze only the truly active funds? The results might surprise you. Read More

Hedge fund fame and fortune comes with strings attached says new paper

Aug 31st, 2009 | Filed under: CAPM / Alpha Theory

A new paper tries to put a value on the "redemption option" that a manager gives to investors and the "funding option" it gives to its prime brokers. Too bad more hedge funds didn't read this before last year.Read More

Fund of Hedge Funds Diversification & the Importance of Life Cycle

Aug 11th, 2009 | Filed under: CAPM / Alpha Theory

The number of underlying managers in a fund of funds can tell you a lot about redemption frequency - but not so much about fees. So says a new academic study.Read More

How Hollywood, lotteries and mutual funds show that all risk is relative

Jul 6th, 2009 | Filed under: CAPM / Alpha Theory

Since the birth of the CAPM, empirical evidence has been uncooperative - showing that high risk investments produce lower returns, not higher ones. Now one author looks beyond equity markets and finds even more evidence against the vaunted CAPM. Read More

Real Estate Alpha

Jun 22nd, 2009 | Filed under: CAPM / Alpha Theory

A lot of research has been conducted on real estate mutual funds. But precious little has ever been conducted on the alpha produced by institutional funds that invest in commercial real estate - until now... Read More

Crowds may not be so “wise” after all

Jun 18th, 2009 | Filed under: CAPM / Alpha Theory

A new book, an industry survey, and media reports have propelled the age-old topic of market efficiency into the spotlight this month. Read More

Study hints that alpha may be finite (at least in the short term)

Jun 14th, 2009 | Filed under: CAPM / Alpha Theory

Is it a coincidence that hedge fund returns are exploding right after the biggest culling in the industry's history?Read More