Nowadays, the value factor is a hot topic among practitioners and researchers as well. It is commonly known that equity factors have a cyclical performance, but many argue that value underperforms for too long. Therefore, many say that the classical HML value factor of Fama and French is dead. On the other hand, there is an emerging amount of research papers that study the value investing with an aim to make some alterations that would result in a profitable factor as the classic B/M ratio looks like it’s not a sensible value factor anymore. This branch of literature was recently enriched by novel research of Blitz and Hanauer (2020). By including more value metrics, altering the investment universe and applying basic risk management techniques, value strategy can become profitable in the long term. Although the modification is sensible, it stills suffer in a recent period. Only time will tell whether the novel resurrected value factors would emerge again as many times in the past…

Authors: David Blitz and Matthias X. Hanauer

Title: Resurrecting the Value Premium

During past months we made a set of articles analyzing the performance of equity factors and selected systematic strategies during coronavirus crisis. These articles were short-ranged with data only from the start of the year 2020, which is enough for the purpose of the quick blog posts, but very short-sighted to see the nature of these strategies. Therefore, we expanded the time range by 20 years. For a better understanding of hedge possibilities of these strategies, we have added a comparison to essential safe-haven assets, not only to equities.

How should be equity factor strategies implemented? In a long-only smart beta) way? As a long-short strategy, as most of the hedge funds usually do? Or in a partially-hedged fashion by going long equity factor and shorting market to offset some of the market risks? There is no one universal answer as it depends on the investment mandate and constraints of each fund manager contemplating to implement factor investing strategies. But recent academic paper written by Benaych-Georges, Bouchaud and Ciliberti suggests that it’s a good idea to go in the direction of long-short implementation (if it’s possible). Managing short book can be challenging; however, the added benefit of lower correlation among strategies gives resultant factor portfolio a significant boost in the return-to-risk ratio (even after accounting for realistic implementation and shorting costs).

Authors: Benaych-Georges, Bouchaud, Ciliberti

Title: Equity Factors: To Short Or Not To Short, That is the Question

Nearly two months ago, in a time of the highest turmoil during the current pandemic crisis, we performed a quick assessment of the status of performance of equity factor strategies. The world has still not been able to ward-off health-care crisis completely, but a lot of countries have made significant progress (on the other hand, there are still a lot of countries in a worse state than a few months ago). Equity indexes have rebounded from the March lows and have removed some of the losses. Therefore, we have received multiple inquiries about the current situation of equity factor strategies.

So it may be a good time to revisit once again how they are performing.