Browsing: CAPM / Alpha Theory

CAPM / Alpha Theory

A Fresh Look at Bubbles: Revising Assumptions

Sep 16th, 2015 | Filed under: CAPM / Alpha Theory, Derivatives

If it is possible for bubbles to arise in frictionless circumstances, then it follows that any theory that treats bubbles as the consequence of friction is, at very best, incomplete. And that is important to know especially if policy makers are busy drawing their own conclusions from those incomplete-or-worse theories. Read More

Supreme Court Decisions: Post-Announcement Hours & Days

Sep 10th, 2015 | Filed under: Alpha Hunters, Alpha Seekers, Alpha Strategies, CAPM / Alpha Theory, Hedge Fund Strategies, Legislation/Court rulings

Presumably the U.S. Supreme Court's decision, in December 2008, that states can in fact make and enforce tougher labeling standards for cigarettes than does the federal government was a negative for tobacco stocks. But did that mean that stock prices had already anticipated the decision before it happened? or that they immediately adjusted downward on the morning the decision was announced? Or ... neither of those? Read More

Billion Dollar Claim from Black Swan Fund: Not from Taleb

Sep 7th, 2015 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics

As regular readers of this blog may recall, I have found much to admire in the writings of Nassim Nicholas Taleb. So I am happy that he had decided to put some distance between himself and a recent claim that Universa made $1 billion when bad news from China shook the world's markets in late August. Read More

Crisis? Tempted to Flee to Shelter of Big Funds? Bad Idea

Jul 29th, 2015 | Filed under: Alpha Hunters, Alpha Strategies, Behavioral finance, CAPM / Alpha Theory, Hedge Fund Industry Trends, Hedge Fund Strategies, Institutional Investing

The authors of a new study of the relationship between fund size and performance employ a database consisting of 7,261 funds and their performance over a twenty year period (1994 to 2014). Spoiler alert: size is bad. Especially in a crisis.Read More

A New Look at Last Year’s Conference Board White Paper on Governance

Jul 27th, 2015 | Filed under: CAPM / Alpha Theory

Last year the Conference Board asked itself several questions germane to corporate governance. They were good questions. The odd thing about the report was the way the greybeards involved simply threw up their hands rather than trying to answer any of them. Read More

European Investor Satisfaction with Smart Beta ETFs

Jun 28th, 2015 | Filed under: Alpha Strategies, CAPM / Alpha Theory, ETFs, Liquid Alts, Risk management, Smart Beta

Two authors at EDHEC remind us that 15% of the assets in any ETF or ETF-like products for European investors were in smart-beta indexed products as of August 2014, and that this amount is growing. They discuss the extent to which investors are pleased with their results. Read More

Lies, Damned Lies and Alpha

May 21st, 2015 | Filed under: Alpha Hunters, Alpha Strategies, CAPM / Alpha Theory

Guest columnist Andrew Beer looks at alpha.Read More

Study: Corporate/Government Cronyism Does Create Alpha

May 3rd, 2015 | Filed under: CAPM / Alpha Theory, Indexes

A new report finds that firms where current public officials are destined to become employees outperform other private firms by 7.43% per year during the three years before the officials/employees pass from one post to the other. The outperformance is highest in the year immediately before the switch, Justas a cynic looking for corrupt quid pro quos would suspect. Read More

They Do It Right Down Under: Australian Institutional Funds

Apr 14th, 2015 | Filed under: Alpha Hunters, Alpha Seekers, Alpha Strategies, CAPM / Alpha Theory, ETFs, Indexes, Institutional Investing

The hapless U.S. mutual funds Chen and Gallagher sample have a nominally positive pre fee alpha only when measured against CAPM. That disappears into the negatives when the baseline used is the Fama-French model, and deeper into the negatives when the momentum factor is added. Read More

EDHEC: Smart Beta Indexes May Be On a Launch Pad

Apr 6th, 2015 | Filed under: CAPM / Alpha Theory, ETFs, Risk management

There have been "a considerable number of product launches in the area of smart beta ETFs," but investors are eager for more, perhaps in the hope the developers will get beyond the "few popular strategies" in that area on which they have so far focused. With more variety may come a real take-off. Read More

Intraday Momentum Confirmed: Day Traders Credited

Mar 24th, 2015 | Filed under: Behavioral finance, CAPM / Alpha Theory, Derivatives, ETFs

The first half-hour return of the S&P 500 ETF predicts the last half-hour return of the same trading day rather well. Why isn't this effect arbitraged away and a random walk restored? Read More

Debates Over Bayesianism Take Cartoon Form

Feb 10th, 2015 | Filed under: CAPM / Alpha Theory, Risk management, Technology

Regular readers of AllAboutAlpha know that Bayesianism, a movement with the world of probability and statistics, has a good deal to do with contemporary pricing models and portfolio theory. It also has foes in that world, the frequentists, and a 2012 cartoon, recently raised to salience again by a Facebook post, has given those frequentists reason to gripe about Bayesian smugness. Read More

If You’re So Smart, Why Aren’t You Rich?

Jan 14th, 2015 | Filed under: Algorithmic and high-frequency trading, CAPM / Alpha Theory

A new paper by a senior market economist at BNP Paribas celebrates the invention of Learning Vector Quantization (LVQ), a machine-learning algorithm that could enable some smart economists to get very rich indeed. Read More

Low-Vol Anomaly Provokes Reflections on an Old Adage

Jan 11th, 2015 | Filed under: CAPM / Alpha Theory, Indexes, Risk management

A new paper by Eric Falkenstein discusses an old question: the reason for the high risk-adjusted return in low-risk equities, and the adjustments it requires in CAPM. This is no fleeting oddity, but a lasting characteristic of markets. In econo-speak, not only the existence but the persistence of the anomaly requires explanation.Read More

The Best Offense is a Good Defense: Profiting from Hedging

Dec 3rd, 2014 | Filed under: Asset allocation, CAPM / Alpha Theory, Performance, Analytics & Metrics, Risk management

A regime switching model may treat a high-volatility environment as one “regime,” and a low-vol environment as its successor regime. The idea, as it applies to risk management, then, is simply to be ready in either setting for the switch to the other. This is both playing defense and playing offense. It is both managing risk and pursuing alpha. Read More

Hedge vs. Mutual Funds and the ‘Timing of Information Acquisition’

Oct 28th, 2014 | Filed under: Behavioral finance, CAPM / Alpha Theory

A new paper by a scholar at the McCombs School of Business looks at what causes what on Wall Street, starting with how (if at all) analyst downgrades cause price declines. Read More

Betting on Vice Doesn’t Really Pan Out

Sep 9th, 2014 | Filed under: Alpha Strategies, Behavioral finance, CAPM / Alpha Theory, Social investing

Christopher Faille, inspired by Greg Richey, of California State University, San Bernardino, has a few words about socially irresponsible investing, that is, the creation of a portfolio built around destructive human vices. Read More

What is Right & What is Wrong With the Sharpe Ratio?

Jul 30th, 2014 | Filed under: CAPM / Alpha Theory, Risk management

Despite what the title (Deflating the Sharpe Ratio) might cause a naïve observer to suspect, de Prado's recent presentation was more pro than con the ratio in question. Mend it, don't end it. Read More

A Challenge to Bayesian Probability

Jul 23rd, 2014 | Filed under: CAPM / Alpha Theory, Performance, Analytics & Metrics

The stakes, for mathematics, finance, and the overlap of the two, are pretty high. So my ears pricked up when I heard of a sweeping challenge to Bayesianism. Read More

Winner Takes All, and Liquidity Takers Win

Jul 22nd, 2014 | Filed under: Algorithmic and high-frequency trading, CAPM / Alpha Theory, Derivatives

It does appear that speed is helpful in generating alpha. How is it helpful? Here there are two views, and the less HFT-friendly of these views has received some scholarly/empirical support. Read More

GMI Numbers-Crunching Predicts Stock Returns

Jun 30th, 2014 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Performance, Analytics & Metrics

Starting with 350 available metrics of corporate governance and/or forensic accounting, GMI Ratings has boiled their model down to just 64, and from those they get three scores. Read More

Remembering Enron and Contending with Warren Buffett

Jun 17th, 2014 | Filed under: Alpha Hunters, Alpha Strategies, CAPM / Alpha Theory

An aphorism of Warren Buffett's once again making the rounds can be understood in at least three distinct ways. Faille looks at the possible constructions and decides that, whatever exactly Buffett meant to say or do, his reasoning here does little harm to his target, modern finance theory. Read More

Europe’s Valuation Practitioners Say: To Heck With Theory

Jun 3rd, 2014 | Filed under: CAPM / Alpha Theory

A recent survey of firm-valuation experts from 10 European countries indicates that they can produce wildly different values given the same inputs. Okay: maybe that’s not too surprising. Any valuation model will necessarily include parameters that will in turn require a best-guess approach, often as subjective in inspiration as itRead More

Axioma on those Low-Vol Picnic Baskets

Jul 25th, 2013 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Indexes

The success of low-volatility strategies has been noted in the literature at least since the mid-1970s, with the publication of a seminal work by Haugen and Heins. And such strategies continue to prove successful today. Why do they still work? Why don't the excess profits draw in the bears, consuming all the picnic baskets, driving profit levels down to normal? Read More

Stop Loss (and Gain) Rules as Alpha Generators

Jul 15th, 2013 | Filed under: CAPM / Alpha Theory

A strategy based largely on stop-loss and stop-gain rules, one that uses such rules as the sole means of shifting assets from one asset class to another, can earn statistically significant CAPM alpha, according to a provocative study from the University of Arizona. Read More

Doing Penance for the Draw-down

May 20th, 2013 | Filed under: Alpha Strategies, CAPM / Alpha Theory, Performance, Analytics & Metrics

Under standard portfolio theory assumptions, it takes three times longer to recover from the maximum draw-down for a particular strategy than it does to get there. Fortunately, those assumptions seem to be wrong in a way that allows for a more rapid return to a high water mark. Read More

A Reductionist View of BAB, Debunked

May 12th, 2013 | Filed under: Alpha Seekers, Alpha Strategies, CAPM / Alpha Theory

Asness, Frazzini and Pedersen produce data indicating that over a long period in the U.S., a regular bet-against-beta strategy, one not designed either to accentuate or to eliminate differences among the different industries represented in the portfolio, earned CAPM alpha of 0.73. Read More

A Bayesian Rethinks CAPM

May 7th, 2013 | Filed under: CAPM / Alpha Theory

A portfolio becomes optimal by virtue not merely of what assets are in it, but by virtue of what is paid for each. Examining the implications of that point, Professor Johnstone finds a "logical circularity built into the CAPM equilibrium pricing mechanism."Read More

A Long-Dead Mathematician and Some Very Lively Problems

Apr 23rd, 2013 | Filed under: CAPM / Alpha Theory

D.J. Johnstone of the University of Sydney Business School tells us that if we understand Bayesian probability theory, we'll see that even a very informative signal can bring an increase in uncertainty, thereby raising the cost of capital. This is at least a little bit counter-intuitive, offending the verities about how wonderful is transparency. Read More

Sibling Rivals: CAPM versus The Risk Parity Portfolio

Aug 16th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Industry Trends, Hedge Fund Operations and Risk Management, Institutional Investing, Performance, Analytics & Metrics

By Christopher Faille A presentation by Samuel Kunz, chief investment officer of the Policeman’s Annuity and Benefit Fund, Chicago, to the CFA Institute 2011 Asset and Risk Allocation conference addressed the pros and cons of “risk parity.”  His presentation makes it seem that risk-parity portfolios (RPP) and the Capital AssetRead More

How well does your hedge fund hedge?

Jul 5th, 2011 | Filed under: CAPM / Alpha Theory, Hedge Fund Operations and Risk Management

A perfectly "hedged" fund is one which has no downside risk. Its payoff relative to the market or some other benchmark is the same as that of the fund plus a put option that provides protection against the downside. In the real world...Read More

Alpha not “dead” – just not always better than beta (as long as you’re sure about the future direction of markets of course)

May 1st, 2011 | Filed under: CAPM / Alpha Theory

A recent research note concludes that alpha (as a performance measure) passed away recently after along battle with beta-tosis and several other ailments. But wait! Did Alpha's nose just twitch?Read More

The Interaction of Demand and Supply Curves for Alpha

Apr 20th, 2011 | Filed under: CAPM / Alpha Theory

If only the marketplace for alpha fit neatly into a model from an Economics textbook.Read More

New spin on the Fundamental Law of Active Management finds US mutual funds were “a victim of their own success”

Mar 31st, 2011 | Filed under: CAPM / Alpha Theory, Real Estate

Finally, a version of the Fundamental Law that fundamental managers can actually use. But be forewarned, if you're a fundamental mutual fund manager, you won't like what it has to say... Read More

The “Most Diversified Portfolio”

Mar 27th, 2011 | Filed under: CAPM / Alpha Theory

Think your basket of thousands of stocks is the most diversified portfolio possible? Maybe not...Read More

Study finds that factor timing isn’t actually a huge source of hedge fund alpha

Mar 16th, 2011 | Filed under: CAPM / Alpha Theory

In the never-ending search for the source of hedge fund alpha, some have looked to factor timing. But a new study suggests that this, like many other possible explanations, falls short of explaining the hedge fund secret sauce.Read More

Managers operating in mature and “efficient” markets rejoice! Study finds you too can generate alpha.

Feb 22nd, 2011 | Filed under: CAPM / Alpha Theory

Thought managers in "inefficient markets" like emerging markets or small cap equities had the advantage when it comes to alpha-generation? Maybe not...Read More

Institutional ownership nears all-time highs. Good or bad for alpha-seekers?

Feb 2nd, 2011 | Filed under: CAPM / Alpha Theory

If a recent study of French institutional investors can be applied to a recent report on US equity markets, alpha opportunities abound for years to come.Read More

Study finds private equity “four-peats” can be more difficult than previously thought

Jan 19th, 2011 | Filed under: CAPM / Alpha Theory

Success breeds success – and expectations of continued success. Except in private equity, where success bodes reversion to the mean, a recent study on performance persistence argues.Read More

Pop Quiz for Long/Short Equity Investors: When does a high “up-capture” not cost you a commensurately high “down-capture”?

Dec 7th, 2010 | Filed under: CAPM / Alpha Theory

The dream long/short equity fund is one that has a high market "up-capture" with little or no market "down-capture". But how do you find your dream fund when up-capture and down-capture fluctuate all the time? Here's one innovative idea... Read More

Finding money where there’s no liquidity

Nov 17th, 2010 | Filed under: CAPM / Alpha Theory

Retail and high net worth investors can now gain access to hedge funds through a number of more liquid vehicles. But is their liquidity one of the very reasons their performance may be lower? Read More

Hubbert’s Peak: Is the world running out of “cheap alpha?” If so, here’s an idea…

Nov 12th, 2010 | Filed under: CAPM / Alpha Theory

The search for alpha is much like the search for oil, prompting us to muse a few years ago about whether there was going to be a Hubbert’s Peak in alpha. But regardless of whether the world is running out of “cheap alpha,” the process of refining crude returns intoRead More

Stock-picking alpha in a life or death struggle?

Oct 31st, 2010 | Filed under: CAPM / Alpha Theory

With stock dispersion at all-time lows, is the art of stock-picking dead or just napping? Read More

Downer for hedge fund managers: Apparently you have no skill, talent or alpha

Oct 6th, 2010 | Filed under: CAPM / Alpha Theory

A recent academic study finds that hedge fund managers has "zero" ability to put their market timing skills to proper use and produce alpha. Read More

Modern Portfolio Theory: Break free dude!

Aug 12th, 2010 | Filed under: CAPM / Alpha Theory

Modern portfolio theory, the hallmark of institutional investing, isn't so modern anymore, according to a new report by State Street that encourages embracing new types of risk models and investment options.Read More

New factor on the block: Research suggests you don’t need alternative investments to get an “illiquidity premium”

Aug 2nd, 2010 | Filed under: CAPM / Alpha Theory

Move over "momentum factor", there's a new kid in town and it's one that is familiar to the alternative investment industry. Read More

Study finds market “under-reaction” to Buffett’s 13F filings, proposes trading strategy to exploit it

Jul 28th, 2010 | Filed under: CAPM / Alpha Theory

In an age where hair-trigger investors exploit information in nanoseconds, here's a trade you can apparently take your sweet time to make.Read More