RA Conversations: The Flattening Yield Curve

Cam Harvey looks at the yield curve today through the lens of his 1986 pioneering work on yield-curve inversions and their foreshadowing of economic downturns. mohamed_hassan / Pixabay Q3 hedge fund letters, conference, scoops etc RA Conversations: The Flattening Yield CurveCam Harvey, PhD Partner & Senior Advisor, Research Affiliates, and Professor, Duke University Jim [...]

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A Backtesting Protocol In The Era Of Machine Learning

Abstract Machine learning offers a set of powerful tools that holds considerable promise for investment management. As with most quantitative applications in finance, the danger of misapplying these techniques can lead to disappointment. One crucial limitation involves data availability. Many of machine learning’s early successes originated in the physical and [...]

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Alternative Risk Premia: Crisis or Opportunity?

Key PointsWe define and study the alternative risk premia (ARP) universe through four distinct core strategy types: equity neutral, volatility, trend, and macro. We believe that a host of underlying drivers, which include rising price volatility, individual factor investing risks, and implementation shortfall, among others, has contributed to the widespread [...]

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The Challenges Of Diversity Investing

Key PointsBoth academic research and our own experience indicate that the business case for corporate diversity is compelling as a result of higher collective intelligence. Testing the investment case for greater diversity faces two major challenges: insufficient historical data and difficulty in measuring whether the culture is one that embraces [...]

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Craftsmanship In Smart Beta

Key PointsInvestors seeking to add smart beta and factor strategies to their portfolios should consider the four craftsmanship elements of product design:  1) universe coverage and weighting mechanism, 2) signal definition, 3) measurement period, and 4) rebalancing frequency. Design decisions guided by these craftsmanship elements can help preserve a portfolio’s [...]

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Is Manager Selection Worth The Effort For Financial Advisors?

Key PointsInvestors, particularly retail investors, are predisposed to chase the returns of investment managers. The academic literature shows manager selection fails to produce positive excess returns, on average. A diligent manager research effort may shrink the large amount of negative alpha from clients’ performance chasing.Q3 hedge fund letters, conference, scoops etcIntroduction This [...]

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Performance Measurement: How To Do It If We Must

Key PointsInvestment professionals can overdo performance measurement simply because technology makes it so easy and it seems a worthwhile task to constantly gauge if clients are on the path to meeting their long-term financial goals. Too often, however, “doing something” based on short-term performance measurement can degrade the long-term performance potential [...]

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Ignored Risks Of Factor Investing

Key PointsThe risks of factor investing are usually understated (perhaps, severely so), and the diversification benefits tend to be overstated. Because factor returns substantially deviate from normality and because correlations between factors are not constant over time, a multi-factor portfolio may retain exposure to the risk drivers of the individual [...]

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When Value Goes Global

Key PointsThe value premium is traditionally associated with stock selection and market timing, however, value investing works just as well when applied globally across major asset classes. The alternative value portfolios we study are typically uncorrelated with their underlying asset classes, traditional value approaches, and each other, thereby offering meaningful [...]

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Buy High And Sell Low With Index Funds!

Key PointsTraditional cap-weighted indices routinely add stocks priced at a high market valuation and sell stocks priced at a deep discount to market valuation—they buy high and sell low! The additions WIN BIG before they’re added; deletions LOSE BIG before they’re dropped. The pattern reverses the year after an index [...]

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Where Do Capital Market Assumptions Come From?

An explanation of how to derive forward-looking return and risk assumptions for asset classes, and how to use these capital market assumptions to set expectations and build portfolios that deliver better outcomes.Get The Timeless Reading eBook in PDF Get the entire 10-part series on Timeless Reading in PDF. Save it [...]

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The Misguided Beliefs Of Financial Advisors

An examination of the common belief that conflicts of interest contribute to the high cost of financial advice reveals most advisors invest personally just as they advise their clients, engaging in frequent trading, returns chasing, selecting expensive actively managed funds, and underdiversifying. Advisors’ net returns of −3% a year [...]

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Rebalance Or Rush Hour?

Key PointsSystematic rebalancing raises the likelihood of improving long-term risk-adjusted investment returns. The benefits of rebalancing result from opportunistically capitalizing on human behavioral tendencies and long-horizon mean reversion in asset class prices. Investors who “institutionalize contrarian investment behavior” by relying on a systematic rebalancing approach increase their odds of reaping the [...]

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Where Is The Global Economy Going?

Key PointsInvestors are wise to look at more granular classifications of the business cycle and not just relatively infrequent NBER recessions. Yield-curve slopes and equity market returns can be used as nowcasting signals to identify turning points of the business cycle. Market signals are implying a number of developed markets—notably, Japan, [...]

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Pundits Predicting Panic In Emerging Markets

Key PointsWith EM stock prices plummeting and investors fleeing EM funds, the fear of emerging markets is palpable. Our examination of three key metrics—external debt, foreign exchange reserves, and current account balance—shows, however, that EM countries have low risk of a broad funding crisis. EM stocks are comparatively cheap when [...]

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Food For Thought: Integrating vs. Mixing

Key PointsThe diversified approach of a multi-factor strategy offers a “smoother ride” through economic and market cycles than a single-factor strategy. Investors should consider both the quantitative and qualitative characteristics of the two most popular multi-factor strategy construction methods—mixing and integrating—before deciding which is best suited for achieving their desired [...]

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