Vol. 17, No. 4, 2019 John Hull, Andrew W. Lo and Roger M. Stein We define long shots as investment projects with four features: (1) low probabilities of success; (2) long gestation lags before any cash flows are realized; (3) large required up- front investments; and (4) very large payoffs (relative to initial investment) in… Read More
Articles
Don’t Get Carried Away: Uncovering Macro Characteristics in Carry Portfolios
Vol. 17, No. 4, 2019 Marco Aiolfi and Yesim Tokat-Acikel 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… Read More
Ratings versus Spreads as Indicators of Price Risk
Vol. 17, No. 4, 2019 Martin Fridson, CFA, Begum Ipek Yavuz, Kai Zhao and Yan Yu Past comparisons of “market ratings,” or yield spreads over Treasury rates, and letter grades published by credit rating agencies have focused on the two indicators’ respective records in predicting defaults or promptness in reflecting company-specific changes in credit quality… Read More
Tilt Nickels To Diamonds: An Orthogonalization Approach
Vol. 17, No. 4, 2019 Wenfeng Wu, George Xiang and Tong Yu Alternative index products often achieve improved performance at the cost of increased exposure to risk. In this study, we propose a portfolio tilting strategy that alleviates the risks inherent to alternative indices by projecting fundamental factors on risk factors to purge the influence… Read More
Bill Gross’Alpha: The King Versus the Oracle
Vol. 17, No. 3, 2019 Aaron Brown and Richard Dewey We set out to investigate whether “Bond King” Bill Gross demonstrated alpha (excess average return after adjusting for market exposures) over his career, in the spirit of earlier papers asking the same question of “Oracle of Omaha,” Warren Buffett. The journey turned out to be… Read More
Return Predictability and Market-Timing: A One-Month Model
Vol. 17, No. 3, 2019 Blair Hull, Xiao Qiao and Petra Bakosova We use weighted least squares to combine 15 diverse variables to build a predictive model for the one- month-ahead market excess returns.We transform our forecasts into investable positions to form a market-timing strategy. From 2003 to 2017, our strategy had 16.6% annual returns… Read More
Embedded Betas and Better Bets: Factor Investing in Emerging Market Bonds
Vol. 17, No. 3, 2019 Johnny Kang, Kevin So and Thomas Tziortziotis We document novel empirical insights driving the prices of sovereign external emerging market bonds. In the time series, we examine the market portfolio’s time-varying exposures to a broad set of macro factors (rates, credit, currency, and equity) and identify these embedded betas as… Read More
How to Beat the Machines Before They Beat You
Vol.17, No.3, 2019 Vineer Bhansali The use of “big” data, algorithms and machine learning is disrupting investment management. By carefully selecting domains where data is sparse and there is possibility of regime changes, a human investor can not only survive, but also thrive in a world of investment machines… Read More
Does Trading by ETF and Mutual Fund Investors Hurt Performance? Evidence from Time- and Dollar-Weighted Returns
Vol.17, No. 3, 2019 Ananth Madhavan and Aleksander Sobczyk This paper analyzes the “return gap” between internal rate of returns that account for intermediate investor flows (“dollar-weighted returns”) and more familiar buy-and-hold returns that funds typically must report. Our sample constitutes all US-domiciled open- end mutual funds and exchange-traded funds (ETFs), and covers both fixed… Read More
Optimal Holdings of Active, Passive and Smart Beta Strategies
Volume 17, No. 2, 2019 Edmund Bellord, Joshua Livnat, Dan Porter and Martin B. Tarlie The growing dominance of the core and explore model — a large passive index combined with a collection of high tracking error satellite portfolios — in conjunction with the growth of factor investing has renewed interest in how to allocate… Read More