New strategies:
#412 – Buy-Side Competition and Momentum Profits
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Very complex strategy
Bactest period: 1980-2012
Indicative performance: 18.00%
Estimated volatility: 23.95%
Source paper:
Hoberg, Gerard and Kumar, Nitin and Prabhala, Nagpurnanand: Buy-Side Competition and Momentum Profits
https://ssrn.com/abstract=3132378
Abstract:
We develop a measure of buy-side competition for momentum investing and show that it explains momentum profits. The monthly momentum spread is 139 basis points when competition is low and is negligible when competition is high. These results are stronger in more investible and lower transaction cost strategies such as value-weighted portfolios and larger capitalization stocks. Better alphas are attained with less negative skewness and better Sharpe and Sortino ratios. Several stock characteristics traditionally related to momentum profits do not explain our results.
#413 – 12 Month Seasonal Reversals
Period of rebalancing: monthly
Markets traded: equities
Instruments used for trading: stocks
Complexity: Complex strategy
Bactest period: 1963-2016
Indicative performance: 5.54%
Estimated volatility: 8.07%
Source paper:
Keloharju, Matti and Linnainmaa, Juhani T. and Nyberg, Peter Mikael: Seasonal Reversals in Expected Stock Returns
https://ssrn.com/abstract=3276334
Abstract:
Stocks tend to earn high or low returns relative to other stocks every year in the same calendar month (Heston and Sadka 2008; Keloharju, Linnainmaa, and Nyberg 2016). In this paper, we show that these seasonalities are balanced by seasonal reversals: a stock that has a high expected return relative to other stocks in one month has a low expected return relative to other stocks in the other months. The seasonalities and seasonal reversals add up to zero over the calendar year. Our evidence suggests that return seasonalities are likely due to temporary mispricing. Seasonal reversals are economically large, statistically highly significant, and they resemble, but are distinct from, long-term reversals. A factor that estimates expected returns from both average same- and other-month returns has a t-value of 9.93, and it is robust throughout the 1963-2016 sample period.
New research papers related to existing strategies:
#2 – Asset Class Momentum – Rotational System
#3 – Sector Momentum – Rotational System
Nadler, Schmidt: Momentum Strategies for the ETF-Based Portfolios
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3269475
Abstract:
We compared performance of past ‘winners’ and past ‘losers’ over the look-ahead period of one month for various portfolios that consist of the US ETFs and the holdings of the US equity Select Sector SPDRs in 2007–2017 and 2011-2017. Namely, we verified the conventional pattern described in the literature according to which there is mean reversion (i.e. past losers outperform past winners in near future) for short past periods and persistent momentum (i.e. past winners outperform past losers in near future) for longer past periods. We also compared performance of momentum-based strategies with that of equal-weight benchmark portfolios (EWBP). We found that the specifics of the momentum strategy pattern and its performance depend on portfolio holdings and whether the bear market of 2008 is included in the data sample. The conventional pattern was statistically significant only for a multi-asset ETF portfolio in both 2007-2017 and 2011-2017, and for proxies of the SPDR S&P500 ETF and Industrials Select Sector SPDR ETF in 2011–2017. Regardless of that, past winners and past losers sometimes outperformed EWBPs.
#234 – Carry Factor within Asset Classes
Aiolfi, Tokat-Acikel: Don’t Get Carried Away: Uncovering Macro Characteristics in Carry Portfolios
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3269361
Abstract:
Investors are increasingly showing interest in risk premia strategies across asset classes. Carry is one of the most studied premia. To successfully execute a risk premia strategy, it is important to have a detailed understanding of how individual premia returns are affected by macroeconomic conditions. The literature reports that carry strategies are commonly exposed to business cycle, liquidity and volatility risks; however, evidence of direct links has never been clearly established. We build on this research by directly measuring the macroeconomic characteristics of carry factor portfolios, namely real economic growth and inflation exposures. By pairing methodologies commonly used to derive fundamental characteristics of equity portfolios, we are able to identify macro linkages that have not been previously made evident. Our holdings-based and factor-mimicking portfolio analyses provide insights into the behavior of carry strategies across various asset classes. This approach can help investors build better carry portfolios by anticipating the payoff in different economic scenarios.
And three additional related research papers have been included into existing free strategy reviews during last 2 weeks:
A new interesting financial research paper gives an idea to build a diversified portfolio of leveraged ETFs (scaled down to have the same risk as a benchmark asset allocation built from a non-leveraged ETFs) to beat benchmark asset allocation. However, caution is needed as the most of the outperformance is due to inherent leveraged position in bonds because excess ratio of cash in portfolio (which is the result of using leveraged ETFs instead of non-leveraged ETFs) is invested in a short to medium term bonds:
Trainor, Chhachhi, Brown: A Portfolio of Leveraged Exchange Traded Funds
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3272486
Abstract:
Leveraged exchange traded funds (LETFs) are marketed as short-term trading vehicles that magnify the daily returns of an underlying index. With the proliferation of LETFs over the last 10 years, a diversified portfolio that mimics the returns of a 100% investment can be created using only a fraction of the investor’s wealth. Results suggest a portfolio created with LETFs outperforms a portfolio using traditional ETFs by approximately 0.6% to 1.4% annually by investing the excess wealth in a diversified or short to mid-duration bond portfolio. Downside risk is reduced using LETFs because the majority of the LETF portfolio is invested in a relatively safe bond fund.
We present two interesting research papers written by Bruce Knuteson. He contemplates why the cyclically adjusted price to earnings ratio of the S&P 500 index has been oddly high for the past two decades. He states that persistently strong equity market in US (and therefore also its high valuation in a comparison to history) and also in other developed countries can be an outcome of intraday trading pattern of several huge quant equity long-short funds which aggressively buy in the morning and sell in the afternoon to expand their trading book.
Bruce Knuteson: Information, Impact, Ignorance, Illegality, Investing, and Inequality
https://arxiv.org/pdf/1612.06855.pdf
Abstract:
We note a simple mechanism that may at least partially resolve several outstanding economic puzzles, including why the cyclically adjusted price to ear nings ratio of the S&P 500 index has been oddly high for the past two decades, why gains to capital have outpaced gains to wages, and the persistence of the equity premium.
And:
Bruce Knuteson: How to Increase Global Wealth Inequality for Fun and Profit
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3282845
Abstract:
We point out a simple equities trading strategy that allows a sufficiently large, market-neutral, quantitative hedge fund to achieve outsized returns while simultaneously contributing significantly to increasing global wealth inequality. Overnight and intraday return distributions in major equity indices in the United States, Canada, France, Germany, and Japan suggest a few such firms have been implementing this strategy successfully for more than twenty-five years.
