Beta-Adjusting Factor Returns

20.July 2023

Beta-adjusted returns equity factors are considerably more stable, indicating that factor construction methodologies may be improved beyond dollar and size neutrality. Low-beta effect at the level of factors confirms the existence of seasonal and momentum effects in the cross-section of factor returns. Altogether, these insights deepen the understanding of factor behavior and can aid the development of more robust factor-based investment strategies.

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Quantpedia in June 2023

7.July 2023

Hello all,

What have we accomplished in the last month?

– Extensions of 5 Quantpedia Pro reports
– 12 new Quantpedia Premium strategies have been added to our database
– 12 new related research papers have been included in existing Premium strategies during the last month
– Additionally, we have produced 7 new backtests written in QuantConnect code
– And finally, 4 new blog posts that you may find interesting have been published on our Quantpedia blog in the previous month

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Combining Gold, Bonds and Low Volatility Stocks

5.July 2023

Even though gold is generally a volatile asset, it is often considered a key diversifier, hedging against inflation or protecting during economic uncertainties. According to the authors (Pim van Vliet and Harald Lohre), in times of extreme macroeconomic events, including war, hyperinflation, or major economic recessions, gold investing is widely regarded as a safe haven. However, using gold as a hedge comes at the cost of lower returns. The authors explored the importance of gold in investment portfolios and its ability to reduce the risk of losses combined with bonds and stocks. Compared to many existing studies, they also consider a longer timeframe and the impact of inflation.

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Why Naively Pursuing Premiums at the Industry and Country Levels Often Does Not Add Value

28.June 2023

Sector/industry picking or country picking can be a profitable trading style but is usually much more challenging than it seems at first sight. Building a good trading model requires a lot of research and dedication. Unfortunately, due to the limited numbers of industries and countries, sorting them on aggregate characteristics can wash out important cross-sectional variations in the characteristics and lead to concentrated portfolios prone to noisier realized returns.

In their fresh Dimensional Fund Advisors research piece, Dong, Huang, and Medhat (2023) touch on the question of whether investors should systematically emphasize certain industries or countries to increase expected returns. Their overhead view provides new insights and sums that investors will likely be better off pursuing premiums in the larger cross-section of individual securities and maintaining broad diversification across the smaller cross-sections of industries and countries.

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Which Investors Drive Factor Returns?

20.June 2023

If different investors share a common goal, why are there differences in strategy choices and portfolio characteristics across investor classes? Elsaify (2022) attempts to provide an answer. In his study, he documents heterogeneity in investors’ processing abilities, which is the key factor influencing investor’s strategy choice and finds that such heterogeneity stems from factor timing ability.

According to the results, hedge funds seem to have the highest attention capacity, the most precise information and excel at factor timing. On the other hand, long-term investors (insurance companies and pension funds), brokers, and short-sellers exhibit low attention capacity because of their timing inability. They spend relatively more attention on the fundamental, their portfolios have the least dispersion and variance and their impact on factor returns is limited.

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ESG Ratings Disagreement in 2023

15.June 2023

Sustainable investing is a topic we cover extensively in the form of systematic ESG investing strategies and/or blogs. Enormous capital allocation decisions are based on ESG ratings given by various agencies. The problem is that there is no actual normalization and standardization, which creates wrinkles on the faces of hedge and pension fund managers when making those critical individual equity allocations, be they inclusions or exclusions.

Ehling, Paul and Sørensen, Lars Qvigstad (January 2023) new paper analyzes the portfolio choice consequences arising from the well-known divergence of ESG scores. From a risk point of view, the optimized ESG portfolios differ more across each other than they differ relative to the benchmark, suggesting that the different rating agencies’ scores result in substantially different portfolios.

And how dissimilar are ratings among the agencies? We find staggeringly comic that ratings of Warren Buffett’s (and Charlie Munger’s) Berkshire Hathaway (NYSE: BRK.B) disagree by a large margin (see red ellipses in Figure 2 below). While Sustainalytics give it an outperforming rating, FTSE and MSCI regard it as one of the top laggards.

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