Hide and Seek: Profiting by Finding Hidden States of Financial Markets in Real Time Anders Nielsen, Goldman Sachs, September 29, 2014 Market environments can be classified into three different “regimes”: crisis, recovery, and stable. Based on the probability that the economy is in a given regime, equity and bond allocations can be sized to maximize…
Growth/Value, Market Cap, and Momentum Jun Wang, Robert Brooks, Xing Lu, and Hunter M. Holzhauer, The Journal of Investing, Spring 2014 Some researchers have questioned the ability to implement momentum strategies without substantially diminishing the related returns. The authors investigate this issue by using indexes to implement their style-based momentum strategy and conclude that a…
“Low-Risk Investing Without Industry Bets” Clifford S. Asness, Andrea Frazzini, and Lasse H. Pedersen, Financial Analysts Journal vol 70(4): 24–41 Some investors assume that the attractive risk-adjusted returns of investing in low-beta stocks have been driven by a structural bias toward defensive industries. The authors, all principals at AQR, seek to dispel this notion by…
“Asset Allocation: Risk Models for Alternative Investments” Niels Pedersen, Sébastien Page, and Fei He, Financial Analysts Journal vol. 70, no. 3 (May/June 2014): 34–45 Investors frequently use factor-based approaches to asset allocation to improve portfolio diversification and implement economic views. The characteristics of alternative asset classes, however, can make it difficult to map them to…
The world is paying increasing attention to its aging population. As policymakers figure out how to deal with rising health care and pension payments, business leaders are trying to position themselves to profit from a shifting age structure. For institutional investors, the key question is how an older population will impact asset prices and the…
“Why Fallen Angels Fall: An Examination of Nonfinancial Corporate Fallen Angels 1999-2013 and 2014 Outlook” Kenneth Emery and Daniel Gates, Moody’s, February 3, 2014 Limits on junk bond holdings in investment-grade portfolios can lead to indiscriminate selling when debt gets downgraded from investment grade to speculative grade. Moody’s examines the long-run characteristics of such “fallen…
“The Arithmetic of ‘All-In’ Investment Expenses” John Bogle, Financial Analysts Journal vol 70, no. 1 (January/February 2014): 13-21. Jack Bogle, the founder of Vanguard, argues that commonly cited expense ratios understate the true, “all-in” cost of investing in actively managed equity mutual funds. He estimates the magnitude of the additional costs and concludes that a…
“Equities (Still) for the Long Run: A New Look at the Equity Risk Premium” Michael W. Crook and Brian Nick, Journal of Investing vol 23, no. 1 (Spring 2014): 27–32. The poor performance of equities during the 2000s and the lack of a simple, sound model for estimating the forward-looking equity risk premium have led…
“What Happens in EM (Mostly) Stays in EM” Goldman Sachs, January 29, 2014 Problems common to multiple emerging markets have attracted increasing attention from investors, helping cause a global sell-off in January. While the domestic challenges for EM countries are likely to persist, argues Goldman Sachs’ economics research team, the risk that they will impact…
“In Search of FX Fair Value” Mark Astley, Ric Deverell, and Bhaveer Shah, Credit Suisse, October 2013 Developing accurate exchange rate forecasts remains an elusive goal for economists and investors alike. Nonetheless, several accepted methods for determining currency fair values exist. Applying Credit Suisse’s own methodology, the bank’s currency strategists note that the U.S. dollar…