Smart Beta

There are various kinds of investors in the stock market, with the common denominator to all of them being the fact that they’re looking to achieve the right risk-to-return balance on their investments. …

Disclaimer: This is not an investment advice Copyright 2023 Bellman, All rights reserved. Introduction Discovering anomalies of price actions & certain fundamental factors have been critical, especially in the equities —many. Many researchers found anomalies like value, quality, growth… etc. However, cryptocurrencies like Bitcoin and Ethereum were commonly considered as a…

Want to improve the risk-adjusted returns of your investment portfolio? Learn how to build a smart beta strategy and discover the benefits of using alternative index construction rules to create a more diversified and efficient portfolio. A smart beta strategy is a type of investment strategy that uses alternative index…

Quantpedia has already covered a countless number of factor investing strategies and articles, from strategies in our Screener to multiple blog posts. Therefore, we can confidently say that we do like factor investing. However, there is always new research with a unique point of view. For example, we recently found a paper focused on the decay of the factor exposures of equity factor strategies. The study examines five factors: Value, Momentum, Quality, Investment, and Low Volatility, across 12 developed and emerging markets over a 20-year period. This research aims to find out how long it takes for a factor to decay after the portfolio is assembled. In other words, how often should the portfolio be rebalanced?

How often do you think about the weights of the assets in your portfolio? Do you weigh your assets equally, or do you prefer value-weighting? The researchers behind a recent research paper analyzed various weighting schemes and examined their effect on factor strategy return. They studied five weighting schemes that ignore prices: equal weighting, rank weighting, z-score weighting, inverse volatility weighting, and fundamental weighting, and three price-based weighting schemes: Rank x mcap (rank-times-mcap), Z-score x mcap (z-score-times-mcap), and Integrated core.

This second article offers a different look at high inflation periods, which we already analyzed in What’s the Best Factor for High Inflation Periods? — Part I. This second part looks at factor performance during two 10-year periods of high inflation. What’s our main takeaway? The best hedge for a high inflation period is the value or momentum factor. Other promising factors (energy sector, small-cap stocks, or long-run reversal) don’t perform as consistently as value and momentum.

Factor investors face numerous choices that do not end even after picking the set of factors. For instance, should they neutralize the factor exposure? If the investor pursues sector neutralization, does the decision depend on a particular factor? Or are the choices different for the long-only investor compared to the long-short investor? The research paper by Ehsani, Harvey, and Li (2021) answers these questions and provides investors with an interesting insight on this topic. https://quantpedia.com/should-factor-investors-neutralize-the-sector-exposure/

The critical question of this research is to examine whether the quality factor could be found in the aggregated groups of similar stocks such as industries or sectors. Additionally, instead of constructing a comprehensive quality metric like other papers, we examine the individual ratios aggregated to the whole sector. The aim is to investigate the fundamental ratios on which quality is based rather than the composite quality score of sectors.

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