New strategies:
#257 – Cloning Hedge Fund Indexes
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: options
Complexity: Simple strategy
Bactest period: 1996 – 2010
Indicative performance: 13.60%
Estimated volatility: 7.60%
Source paper:
Jurek, Stafford: The Cost of Capital for Alternative Investments
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1910719
Abstract:
We document that the risks and pre-fee returns of broad hedge fund indices can be accurately matched with simple equity index put writing strategies, which provide monthly liquidity and complete transparency over their state-contingent payoff profiles. This nonlinear risk exposure combines with large allocations, typical among investors in alternatives, to produce required rates of return that are more than twice as large as those implied by popular linear factor models. Despite earning annualized excess returns over 6% between 1996 and 2010, many hedge fund investors have not covered their proper cost of capital.
New research papers related to existing strategies:
#5 – FX Carry Trade
Ganepola: Carry Trades and Tail Risk of Exchange Rates
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2555805
Abstract:
Historically, Carry trades have been a success story for most investor and a major source of funds for emerging economies maintaining higher interest rates. Therefore it’s a timely topic to investigate the risk embedded in such transactions and to what extent the carry trade returns explain the tail risk. Initially, this research estimates the tail index of all the currencies and formulates a unique inverse function for all the currencies in relation to Power laws, with the idea of estimating the respective Value-at-Risk. This research considers twenty five currencies and replicates them in to five portfolios based on the annualised daily return of a weekly forward contract. Trade was executed assuming a U.S. investor, who goes long in a high return portfolio and short in a low return portfolio. Further, this research examines the impact of carry trade returns on the overall tail risk within the context of foreign exchange and interest rate gain in long and short positions of the trade. The results indicate that tail risk cannot be explained effectively by its returns because of its exponential nature. However, I find that tail risk is mostly influenced by the long position of the carry trade. Furthermore, the return of the foreign exchange component appears to have a better explanation on the tail risk compared to the interest rate return. The Value-at-Risk analysis also suggests that the tail risk of overall strategy is influenced by the tail risk of foreign exchange component embedded in the long position of the trade.
#14 – Momentum Effect in Stocks
Sarwar: Sources of Momentum Returns: A Decomposition of the Explained and the Unexplained Risk Factors
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2558783
Abstract:
In this paper, I examine the sources of momentum returns and uncover a list of intriguing features. I find that when the momentum returns are decomposed the contributions of the explained and the unexplained risk factors depend on the level of analysis, the risk factors used, and the lag structure of the risk factors. Further, I find that at the individual stock level, the total contribution of the lagged macroeconomic risk factors is 59 percent per month but that the total contribution of the contemporaneous macroeconomic risk factors at the portfolio level is only 9 percent per month. These new findings add important insights to the existing momentum theories.
#25 – Small Capitalization Stocks Premium Anomaly
Asness, Frazzini, Israel, Moskowitz, Pedersen: Size Matters, If You Control Your Junk
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2553889
Abstract:
The size premium has been challenged along many fronts: it has a weak historical record, varies significantly over time, in particular weakening after its discovery in the early 1980s, is concentrated among microcap stocks, predominantly resides in January, is not present for measures of size that do not rely on market prices, is weak internationally, and is subsumed by proxies for illiquidity. We find, however, that these challenges are dismantled when controlling for the quality, or the inverse “junk”, of a firm. A significant size premium emerges, which is stable through time, robust to the specification, more consistent across seasons and markets, not concentrated in microcaps, robust to non-price based measures of size, and not captured by an illiquidity premium. Controlling for quality/junk also explains interactions between size and other return characteristics such as value and momentum.
#38 – Accrual Anomaly
#127 – Accrual Anomaly ver.2
Guo, Maio: A Simple Model that Helps Explaining the Accruals Anomaly
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2559458
Abstract:
We propose a new multifactor model to price the cross-section of average excess returns associated with accruals portfolios, and hence explain the accruals anomaly. Our model represents an application of the Intertemporal CAPM from Merton (1973), where the key factors are the innovations on the term spread and value spread. The model clearly outperforms the simple CAPM, and shows large explanatory power for the cross-sectional risk premia associated with three different groups of accrual portfolios. Moreover, the model compares favorably with alternative multifactor models widely used in the literature. Our results remain robust by using equal-weighted accruals portfolios.
