Smart beta

What’s the Best Factor for High Inflation Periods? – Part II

13.April 2022

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. The 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.

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What’s the Best Factor for High Inflation Periods? – Part I

11.April 2022

Another period of long sustained high inflation is probably right around the corner, as the Russia-Ukraine Conflict keeps evolving, and its end is nowhere to be seen. In this article, we analyzed the Consumer Price Index from the Federal Reserve Bank of Minneapolis, which includes the rate of inflation in the USA since 1913. We found multiple years during which the inflation was abnormally high and analyzed the performance of the known equity long-short factors. The factors with the highest average performance are HML (value stocks), long-term reversal, momentum, and energy stocks. On the other hand, tech stocks, bond-like assets, and the SMB factor should be avoided during the high inflation periods.

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Nuclear Threats and Factor Performance – Takeaway for Russia-Ukraine Conflict

31.March 2022

The Russian invasion of Ukraine and its repercussions continue to occupy front pages all around the world. While using nuclear forces in war is probably a red line for all of the mature world, there is still possible to use nuclear weapons for blackmailing. What will be the impact of such an event on financial markets? It’s not easy to determine, but we tried to identify multiple events in the past which were also slightly unexpected and carried an indication of nuclear threat and then analyzed their impact on financial markets.

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Factor Performance in Cold War Crises – A Lesson for Russia-Ukraine Conflict

8.March 2022

The Russia-Ukraine war is a conflict that has not been in Europe since WW2. And it has great implications not only on human lives but also on security prices. It bears numerous characteristics of the cold war crises, where two nuclear powers (Soviet Union and USA/NATO) were often very close to hot war or were waging a proxy war in 3rd countries. We thought it might be wise to look at similar periods from the past to understand what happens in such situations. We selected five events and analyzed the performance of main equity factors (market, HML, SMB, momentum & 2x reversal) and energy and fixed income proxy portfolios.

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Should Factor Investors Neutralize the Sector Exposure?

8.February 2022

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.

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Factor Performance in Bull and Bear Markets

27.January 2022

Do common equity factors suffer during bear markets? Undoubtedly, the market factor is a rather unpleasant investment during bear markets, but what about the long-short factors? Are they able to deliver performance? The research paper by Geertsema and Lu (2021) provides several answers and interesting insights.

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