diversification - QuantPedia

Using Inflation Data for Systematic Gold and Treasury Investment Strategies

February 21, 2025

Inflation significantly impacts the prices of gold and treasury bonds through various mechanisms. Gold is often viewed as a hedge against inflation, while treasury bonds exhibit a more complex relationship influenced by interest rates and investor behavior. This relationship between inflation, gold, and treasuries is well understood, but the real question is whether we can systematically capitalize on it. In this article, we explore how inflation data can be used to build trading strategies—and as our findings suggest, the answer is a definite yes.

Seasonality Patterns in the Crisis Hedge Portfolios

January 30, 2025

Building upon the established research on market seasonality and the potential for front-running to boost associated profits, this article investigates the application of seasonal strategies within the context of crisis hedge portfolios. Unlike traditional asset allocation strategies that may falter during market stress, crisis hedge portfolios are designed to provide downside protection. We examine whether incorporating seasonal timing into these portfolios can enhance their performance and return-to-risk ratios, potentially offering superior risk-adjusted returns compared to static or non-seasonal approaches.

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.

Outperforming Equal Weighting

August 2, 2024

Equal-weighted benchmark portfolios are sometimes overshadowed by the more popular market capitalization benchmarks but are still popular and often used in practice. One of the advantages of equal-weighted portfolios is that academic research shows that in the long term, they tend to outperform their market-cap-weighted peers, mainly due to positive loadings on well-known factor premiums like size and value. So, if equal weighting outperforms market-cap weighting (in the long term), what options do we have if we want to outperform equal weighting? A recent paper by Cirulli and Walker comes to our aid with an interesting proposal …

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.

How Much Bitcoin Should We Allocate To the Portfolio?

February 26, 2024

After years of waiting, the recent launch of spot Bitcoin ETFs marked a significant milestone in the cryptocurrency market, making Bitcoin even more accessible for investors. Spot ETFs provide a convenient and regulated way to gain exposure to Bitcoin without the need to hold the digital asset directly, potentially attracting a broader range of market participants. Many investors are waiting to see this change’s long-term impact on the cryptocurrency’s price while putting their faith in the potentially significant returns from Bitcoin within their investment portfolios. These events are taking place after two significant milestones in Bitcoin’s history – the introduction of BTC futures in 2017 and the launch of the BTC futures ETF (BITO) in 2021. While examining the whole history of Bitcoin may give the impression of a new super asset, we need to set realistic expectations. What have all these historical changes brought, and what lessons can we learn from similar occurrences involving other assets throughout history?

Pragmatic Asset Allocation Model for Semi-Active Investors

January 11, 2024

The primary motivation behind our study stems from an observation of the Global Tactical Asset Allocation (GTAA) strategies throughout the existing papers – the majority of them require relatively frequent rebalancing from the point of view of the ordinary investor. Portfolio rebalancing is usually done on a weekly or monthly basis, and while this period may seem overly boring and slow for the majority of traders (who like to trade on intraday or daily basis), fans of GTAA strategies are not traders; they are investors. Of course, some like to follow the ebbs and flows of the market. But a lot of investors just want to have a life. The financial market is not their hobby. However, on the other hand, they also do not want to hold just the passive buy & hold portfolio. Recognizing the demand for the semi-active strategy, we introduce our novel Pragmatic Asset Allocation.

Estimating Stocks-Bonds Correlation from Long-Term Data

October 29, 2023

There are a few concepts in the world of finance that are taken for granted, and one of them is the free lunch of diversification. Investors like to mix stocks and bonds into a simple allocation portfolio and hope for better outcomes than investing in just one asset. But the favorable return-to-risk profile of those asset allocation strategies relies on the low correlation between those two asset classes, which, as we will see from today’s contribution, we can’t take for granted. We hope the recent study sheds more light on this topic.