Cornell, Hsu, and Nanigian discover that the investment manager selection methodology commonly employed by industry practitioners turns out, in fact, to be a detriment to performance. The recent track record of an active manager contains no useful information about her future outperformance. In fact, recent performance is often a contrarian indicator! Asset owners, who select […]
Rayliant’s research team, led by Dr. Jason Hsu, applied well-studied factor strategies from the U.S. equity anomalies literature to Chinese A-shares, demonstrating which factors have worked and which have not over the last two decades since the opening of China’s stock markets. While a number of traditional factors such as value and size appear to work well […]
Cao, Hsu, Xiao, and Zhan examine the impact of smart beta equity exchange-traded funds (ETFs) on how investors evaluate active mutual fund performance. They find that when smart beta ETFs are actively traded, mutual fund flows become “smarter”, with a higher sensitivity to alphas from multi-factor models. The dominance of the CAPM alpha weakens and […]
Not every factor profits investors when implemented through a passive strategy. Size and quality show weak robustness, and liquidity-demanding factors, such as illiquidity and momentum, are associated with high trading costs. Investors may be better off accessing these factors through active management rather than indexation.
Contrary to the belief of many casual central bank watchers, there is a striking parallel between China’s quantitative easing and that of Japan, U.S. and Europe. Just as the Fed expands its balance sheet to bankroll the U.S. government, so does the Chinese central bank – through its state-owned banking satellites – expand its balance sheet to lend to SOEs to promote employment and growth.
Cornell and Hsu assert that the standard consumption-based model has failed to explain the cross-section of expected returns because its assumption that security prices are set by end investors, who wish to maximize their intertemporal consumption, is counterfactual.
Complexity can dampen investor understanding, leading to poor investment decision making and ultimately derailing long-term financial goals—yet the bias toward investment complexity persists, reinforced by explanations that are behavioral in nature.
Substantial evidence supports cyclicality in factor returns. Evidence also indicates most investors don’t fully benefit from this insight due to behavioral biases—but contrarian investors do.
The rapid rise and sharp decline of the A-shares market represents a massive redistribution of wealth, especially painful to uninformed investors who bought hot stocks near the peak. What should the Chinese government do now?
Despite the large body of literature on the importance of asset allocation as a primary determinant of portfolio performance, the definition of asset allocation “alpha” remains a poorly defined concept. In this article, we show that a portfolio’s total alpha can be decomposed into alpha from asset allocation and manager selection. The asset allocation alpha […]
Quantitative easing enables the government to issue low-cost debt and support undisciplined spending. This spending, in turn, generates inflation, which chokes off private sector growth and transfers wealth from future taxpayers to the current generation, CIO Jason Hsu writes in this commentary.
The risks embedded in asset-based risk parity portfolios are explored using a simple, economically motivated approach. Such an approach can go a long way toward demystifying and making more explicit the drivers of performance and risks of asset-based risk parity portfolios. Investors in risk parity can use this approach for more robust portfolio construction and […]
A traditional asset allocation framework allocates to various asset classes with the goal of matching important risk exposures. In reality, many asset classes share exposures to common risk factors and thus are highly correlated, particularly with equities. This article explains how investors can achieve more intuitive and perhaps more sensible portfolios with an approach based on risk factors.
Research makes a compelling case that investors should rebalance their portfolios, yet most investors do not do so. Why not? The answer is less about “behavioral mistakes” and more about the fact that “rational” individuals care more about other things than simply maximizing investment returns.
Numerous studies show that most active managers fail to deliver “alpha” over time net of fees. And yet investors continue to pay high fees for active management. This article asks why investors persist in such seemingly irrational behavior. As long as active managers can keep on charging high fees, they will do so. It is time for investors to examine how much they are willing to pay for an elusive risk premium.
There is an alternative to traditional passive and active equity allocations—“alternative” beta” or “strategy index” options. Our research on this subject compares seven leading alternative beta strategies. The results—originally published in the Financial Analysts Journal–may surprise you.
In this article, the authors conduct a horse race between representative risk parity portfolios and other asset allocation strategies, including equal weighting, minimum variance, mean–variance optimization, and the classic 60/40 equity/bond portfolio. They find that the traditional risk parity portfolio construction does not consistently outperform (in terms of risk-adjusted return) equal weighting or a model […]
Classical performance attribution methods do not explicitly assess managers’ dynamic allocation skill in the factor domain. The authors propose a generalized framework for performance attribution that decomposes the allocation effect into value added from both static and dynamic factor exposures and thus yields additional insight into sources of manager alpha To learn more, read the […]