Diversification

Which Alternative Risk Premia Strategies Works as Diversifiers?

24.October 2023

In the ever-evolving world of finance, the quest for stable returns and risk mitigation remains paramount. Traditional asset classes, such as stocks and bonds, have long been the cornerstone of investment portfolios, but their inherent volatilities and susceptibilities to market fluctuations necessitate a more diversified approach. Enter the domain of alternative risk premia (ARP) – strategies designed to capture returns from diverse sources of risk, often orthogonal to traditional market risks. Our exploration in this blog post delves deep into this subject, shedding light on which ARP strategies can truly serve as robust diversifiers in the complex financial tapestry.

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Are Commodities a Good Investment? It Depends on the Country

22.September 2023

In recent years, the diversification potential of commodities has come under scrutiny. While the majority of studies examining the role of commodities in a portfolio typically focus on U.S. investors or those dealing primarily with U.S. dollar-denominated assets, Dequiedt et al. (2023) offer a unique perspective by considering the viewpoint of domestic investors in a sample of 38 developed and emerging countries. The study explores the relationship between diversification benefits of commodities for local investors and country’s level of commodity risk exposure. Findings reveal that incorporating commodities tends to enhance the Sharpe ratio of the optimal domestic asset portfolios in most countries with low commodity dependence but doesn’t benefit highly commodity-dependent ones.

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Performance of Factor Strategies in India

31.August 2023

India is a big emerging market, actually the second biggest after China. We primarily look at developed markets, mostly the U.S. and Europe, and from Emerging Markets, China at most, and we are aware that we neglect this prospective country. We would like to correct this notion and give attention to a country that is (along with China) being cited as a new potential rising superpower and already looking to take the lead of Emerging Markets (EM) countries. Today, we would like to review the paper that analyzes the performance of main equity factors (with an emphasis on the Quality factor) and is a good starting point to understand the specifics of factor investing strategies in India.

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In-Sample vs. Out-Of-Sample Analysis of Trading Strategies

2.June 2023

Science has been in a “replication crisis” for more than a decade. But what does it mean to us, investors and traders? Is there any “edge” in purely academic-developed trading strategies and investment approaches after publishing, or will they perish shortly after becoming public? After some time, we will revisit our older blog on this theme and test the out-of-sample decay of trading strategies. But this time, we have hard data – our regularly updated database of replicated quant strategies.

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Anomaly Discovery and Arbitrage Trading

19.May 2023

Today, we will look closer into the hood of life expectancy of investment strategies and try to answer the critical question on which many, in some sense, if not all, trading strategies are built: what happens with anomalies after their discovery? The paper’s authors, with the sweet, simple name Anomaly Discovery and Arbitrage Trading, analyze a stylized model of anomaly discovery, which has implications for both asset prices and arbitrageurs’ trading. Their original research produced an arbitrageur-based asset pricing model that shows that discovering an anomaly reduces the correlation between the returns of its long- and short-leg portfolios: HFs (professional arbitrageurs) use to increase (unwind) such trades when their wealth increases (decreases), further supporting the view that the discovery effects work through arbitrage trading. This effect is more substantial when arbitrageurs’ wealth is more volatile.

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Is Gold a Safe Haven? It Depends on the Country

24.March 2023

If you’re a regular reader of our blogs (and we hope you are!), you would not miss that we like to touch macro-economic subjects. One of that never-fading topics is the role of gold as a crisis hedge. The probably most known commodity is a popular choice for a portion of the total portfolio, from small investors to central banks, for various reasons (be it diversification or hedging). So let’s not further delay it, and today we ask: Is gold really a safe haven?

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