asset allocation - QuantPedia

How Does the Passive Investing Impact Market Risk?

November 18, 2024

The rise of passive investing has been one of the most profound trends in the asset management industry in the past two decades. However, how does the popularity of passive funds impact market risk? We can rely on the data, and a recent research paper shows that the impact is significant, mainly through a substantial increase in stock correlations. As more investors flock to passive funds, which track indices, the prices of stocks within those indices tend to move more in tandem, increasing market-wide risk.

Pre-Holiday Effect in Commodities

October 14, 2024

Our research will explore the intriguing phenomenon of the Pre-Holiday effect in commodities, particularly crude oil and gasoline. Historical data reveals a short-term price drift prior to major U.S. holidays, suggesting a trend in these markets. We hypothesize that this anomaly may be driven by increased demand for oil and its derivatives, such as gasoline, as people prepare for travel, often by car, during the holiday season. This seasonal behavior offers unique opportunities for market participants.

How to Improve Commodity Momentum Using Intra-Market Correlation

September 16, 2024

Momentum is one of the most researched market anomalies, well-known and widely accepted in both public and academic sectors. Its concept is straightforward: buy an asset when its price rises and sell it when it falls. The goal is to take advantage of these trends to achieve better returns than a simple buy-and-hold strategy. Unfortunately, over the last decades, we have been observers of the diminishing returns of the momentum strategies in all asset classes. In this article, we will present an intra-market correlation filter that can help significantly improve commodity momentum performance and return this strategy once again into the spotlight.

Insights from the Geopolitical Sentiment Index made with Google Trends

September 3, 2024

Throughout history, geopolitical stress and tension has been ever-present. From ancient civilizations to today’s world, global dynamics have been largely shaped by wars, terrorism, and trade disputes. Financial markets, as always, have keenly observed and been significantly influenced as a result.

Our article delves into understanding this relation between geopolitical stress and financial markets, particularly the equity market. To briefly explain our approach, we seek to quantify geopolitical stress through an observable Geopolitical Stress Index (GSI). Using this index, we can explore the relation between geopolitical sentiment, good and bad, and instruments available on financial market. Lastly, we seek to see if geopolitical sentiment is something that can be used to impact trading decisions and develop profitable trading strategies.

A Few Thoughts on Pragmatic Asset Allocation

June 27, 2024

One of the main reasons why the Pragmatic Asset Allocation Model was designed is to give investors a tax-efficient possibility to invest in a global equity portfolio with a lower risk than the passive buy&hold approach. Therefore, the PAA model is not the “absolute return” model but rather the tactical model that prefers to invest in the equity risk premium and move to the hedging portfolio (gold, treasuries, or cash), only for short periods and only when it’s absolutely necessary. We use price trend+momentum indicators and yield curve inversion as signals for such situations when (based on the past data) there is a higher probability of recessions and equity bear markets. What is unusual in the current situation is the length of time that the YC is inverted (19 months at the moment), which makes it the 2nd longest YC inversion in the last 100 years, and we are analyzing the implications for the PAA model.

What’s the Size of the Risk Premia (from the Analysts’ Perspective)

May 22, 2024

The topic of today’s short blog post concerns a subject that’s connected to everybody participating in financial markets worldwide: different subjective return expectations. It is reasonable to have some expected returns you can count on if you are putting your money at risk. But how do they differ between different market professionals? And are return expectations influenced by recessions? We will look closely at financial analysts and their views on risk premia. The main point from the authors of the analyzed paper stresses the idea that analysts are counter-cyclical.

800 Years on the Financial Markets

May 17, 2024

Have we mentioned, that we love history? Probably more than just once. What we like on the academic studies which use longterm data is that they offer a bird-like view on the financial markets. The daily noise and ebbs and flows retreat into the background and macroeconomic and geopolitical trends emerge. This top-down analysis helps to design the asset allocation or shape the overall structure of the portfolio of systematic trading strategies that may then trade on the higher frequency. Bryan Taylor’s paper offers a treasure of tables and charts depicting over 800 years of history of returns of global stocks, bonds and bills.

Private vs. Public Investment Strategies

May 1, 2024

Choosing the right investment strategy plays a crucial in portfolio allocation decisions, particularly when considering both private and public asset classes. While the reported performance of public assets typically matches their real-world performance, the same cannot be said for private assets due to the complexities of fund selection, commitment pacing, and return on uncalled and uncommitted capital. Fortunately, there are ways to incorporate public and private asset classes into one portfolio optimally. One example is the recent paper written by Xiang Xu, which introduces the Fair Comparison (FC) framework, which provides a methodology to measure the real-world performance of private investment strategies.

Portfolio Diversification Including Art as an Alternative Asset

March 15, 2024

Alternative investment assets (also such as rare vintage and collectible items, expensive old high-quality alcohol, discontinued fashion, etc.) are a hit among wealthy investors, even though it is not easy to obtain direct or indirect exposure to diversified art investment(s) in a traditional finance kind of way. However, alternative assets are helpful in portfolio diversification as they last (if stored properly), usually appreciate in value (but sometimes not very predictably), and have a low correlation to traditional assets like stocks, real estate, gold, or fixed-income securities. Although alternative assets are highly illiquid and sometimes very challenging to value correctly, researchers are interested in them. We will closely look at one of the research papers that investigates the role of art in the portfolio, utilizing mean-variance optimization and less-used STL decomposition.

Systematic Hedging of the Cryptocurrency Portfolio

March 13, 2024

Cryptocurrencies are already one of the major asset classes. They fill the top pages of magazines and are a topic of a day to day conversation. There are a lot of ways to buy them through a lot of different channels. But some of the hardcore HODLers like to keep their coin portfolio safe – they buy a portfolio of cryptocurrencies and hold them in cold storage. It has a lot of advantages (you will probably not become a victim of hacking if your crypto coins are in cold storage in your wall safe) but also some disadvantages (your cold storage device can become unreadable or destroyed). One of the disadvantages of cold storage is that while you hold the cryptocurrencies in your cold storage, you are exposed to the price swings of the cryptocurrency market (which can be tremendous). But do you need to have this risk, especially when the market is at an all-time high? What if you smartly hedged a portion of your portfolio? The goal of this article is to serve as an inspiration for a hedging strategy for your cold storage cryptocurrency portfolio. We do not say this is the only way to run a hedging strategy, but we would like to inspire you to start thinking about this possibility even when you have not considered it yet. Are you ready? Then let’s go 🙂