Is Sector Neutrality in Factor Investing a Mistake?
By Tommi Johnsen, PhD|April 15th, 2024|Research Insights, Factor Investing, Basilico and Johnsen, Academic Research Insight|
The justification for neutralizing sectors in factor strategies is a work in progress. To date, academic researchers haven't had an empirical model to mimic the impact of removing sector "effects" on the measurement and performance of factor strategies. The authors develop and test a two-component model to address the question of, "Is Sector Neutrality in Factor Investing a Mistake?"
Minimizing the Risk of Cross-Sectional Momentum Crashes
By Larry Swedroe|April 12th, 2024|Research Insights, Factor Investing, Larry Swedroe, Other Insights, Momentum Investing Research|
While the empirical research on cross-sectional (long-short) momentum has shown that returns have been high, investors have also experienced huge drawdowns—momentum exhibits both high kurtosis and negative skewness. Since 1926 there have been several momentum crashes that featured short, but persistent, periods of highly negative returns. For example, from June to August 1932, the momentum portfolio lost about 91%, followed by a second drawdown from April to July 1933.
Global Factor Performance: April 2024
By Wesley Gray, PhD|April 9th, 2024|Index Updates, Research Insights, Factor Investing, Tool Updates, Tactical Asset Allocation Research|
The following factor performance modules have been updated on our Index [...]
Fee Variation in Private Equity
By Elisabetta Basilico, PhD, CFA|April 8th, 2024|Private Equity, Research Insights, Basilico and Johnsen, Academic Research Insight, Other Insights|
Given the significant growth of investment in private markets, there have been increasing demands for greater transparency in the operation and structure of private market funds. This paper aims to address questions such as whether fees are set uniformly within most funds, and if not, by how much do they vary.
How the Stock Market Impacts Investor Mental Health
By Larry Swedroe|April 5th, 2024|Research Insights, Factor Investing, Behavioral Finance|
Studies have found that there is a correlation between stock market downturns and an increase in hospital admissions for mental illness, an increase in domestic violence, deteriorating mental health among retirees, and increased depression rates.
Tail Hedging Is Not As Easy As You Think
By Jose Ordonez|April 3rd, 2024|Smarter in 10 Minutes, Skewness, Options, Volatility (e.g., VIX), Crisis Alpha, Podcasts and Video|
Convexity can provide explosive payoffs from unlikely events. It’s a powerful weapon to wield, but like most weapons, it could be inefficient or even dangerous in the hands of the untrained.
DIY Trend-Following Allocations: April 2024
By Ryan Kirlin|April 1st, 2024|Index Updates, Research Insights, Tool Updates, Tactical Asset Allocation Research|
Full exposure to domestic equities. Full exposure to international equities. Full exposure to REITs. Partial exposure to commodities. Partial exposure to intermediate-term bonds.
Valuing Artificial Intelligence (AI) Stocks
By Tommi Johnsen, PhD|April 1st, 2024|Research Insights, Basilico and Johnsen, Academic Research Insight, AI and Machine Learning|
While there is literature that describes the "domain" of artificial intelligence, there are very few, if any that analyze the valuation and pricing of AI stocks. The authors attempt to fill the void with a two part methodology.
Economic Momentum
By Larry Swedroe|March 29th, 2024|Larry Swedroe, Factor Investing, Research Insights, Other Insights, Momentum Investing Research|
Strong empirical evidence demonstrates that momentum (both cross-sectional and time-series) provides information on the cross-section of returns of many risk assets and has generated alpha relative to existing asset pricing models.
Options 101: Understanding Options Basics
By Jose Ordonez|March 27th, 2024|Options|
Options have a bad reputation, and for good reason. After all, our friends at Wall Street Bets have taken over and turned the options market into a casino. But just like options can be used for gambling, they can also be used to structure risk and formulate payoffs that have the potential to reduce risk at the portfolio level. In fact, options are one of the best tools at our disposal to manage portfolio risk, if used correctly.