Factor allocation

A Few Thoughts on Pragmatic Asset Allocation

27.June 2024

One of the main reasons why the Pragmatic Asset Allocation Model was designed is to give investors a tax-efficient possibility to invest in a global equity portfolio with a lower risk than the passive buy&hold approach. Therefore, the PAA model is not the “absolute return” model but rather the tactical model that prefers to invest in the equity risk premium and move to the hedging portfolio (gold, treasuries, or cash), only for short periods and only when it’s absolutely necessary. We use price trend+momentum indicators and yield curve inversion as signals for such situations when (based on the past data) there is a higher probability of recessions and equity bear markets. What is unusual in the current situation is the length of time that the YC is inverted (19 months at the moment), which makes it the 2nd longest YC inversion in the last 100 years, and we are analyzing the implications for the PAA model.

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800 Years on the Financial Markets

17.May 2024

Have we mentioned, that we love history? Probably more than just once. What we like on the academic studies which use longterm data is that they offer a bird-like view on the financial markets. The daily noise and ebbs and flows retreat into the background and macroeconomic and geopolitical trends emerge. This top-down analysis helps to design the asset allocation or shape the overall structure of the portfolio of systematic trading strategies that may then trade on the higher frequency. Bryan Taylor’s paper offers a treasure of tables and charts depicting over 800 years of history of returns of global stocks, bonds and bills.

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Which Stock Return Predictors Reflect Mispricing and Which Risk-Premia?

20.March 2024

The degree of stock market efficiency is a fundamental question of finance with considerable implications for the efficiency of capital allocation and, hence, the real economy. Return predictability is a cornerstone that allows investors to estimate their returns with ranging precision. Some anomalies allow one to exploit loopholes in global markets and capture substantial alpha, which violates the Efficient Market Hypothesis (EMH). However, whether this alpha arrives from risk premia or its source is mispricing is still puzzling academics around the globe, and they wrap their head around solving these tricky question.

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Robustness Testing of Country and Asset ETF Momentum Strategies

20.February 2024

The efficacy of ETF momentum strategies, while robust until around 2010, began to show signs of waning in subsequent years. This observation raises questions about the sustainability and adaptability of these strategies in varying market cycles. Central to this research is exploring how various factors/parameters—such as the ranking period, the selection quantity of assets, and the liquidity of ETFs—impact the performance of ETF momentum strategies. The aim is to uncover whether these strategies can deliver sustainable alpha in the complex and ever-evolving market landscape of the 2020s.

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Gauging Existing Technical Fundamental Features through Mutual Information

16.February 2024

Investing truly is an intense intellectual undertaking. For a Portfolio Manager (PM) to execute an investment, they must first convince themselves, then others, that the rationale behind the investment is sound. The variables they utilize in developing their rationale are of the upmost importance; These variables inevitably serve as a foundation in the evaluation of a given Asset, and therefore possess the power to influence a PM’s level of confidence in the investment. If a variable is weak, it can lead to a poor diagnosis of the asset in question, which can lead to unfavorable results on a given investment. If a variable is strong, then it will indeed provide insight into asset and therefore help paint a clear picture into the future of the asset. To be on the right side of this sword, it is imperative that portfolio managers correctly implement quantitative reasoning if not within their decision-making process, then definitely around it. This article introduces the theory of mutual information as a tool for asset managers to gauge the predictive efficiency of their selected variables.

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The Distribution of Stock Market Concentration in the U.S. Over the History

13.February 2024

More and more, a few mega-cap companies dominate the US stock market performance. Financial journals come up with different names for those stocks every few years. They are now called the “Magnificent Seven”, but we all remember FAANG, right? Naturally, several questions arise – Is the current status quo, when the stock market capitalization is highly concentrated among the few extremely large companies, an exception or rule over history? And what’s the impact of this concentration on the performance of the one particular factor – the Size premium? We present the research paper written by Emery and Koëter that tries to answer those questions. 

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