Publications

Does Past Performance Matter in Investment Manager Selection

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 […]

Anomalies in Chinese A-Shares

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 […]

Smart Beta, “Smarter” Flow

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 […]

Will Your Factor Deliver? An Examination of Factor Robustness and Implementation Cost

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.

Quantitative Easing—Beijing Style

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.

The Self-Fulfilling Prophecy of Popular Asset Pricing Models

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.

The Confounding Bias for Investment Complexity

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.

If Factor Returns Are Predictable, Why Is There an Investor Return Gap?

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 China Syndrome: Lessons from the A-Shares Bubble

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?

The Whole Story: Factors + Asset Classes

Some of the investment industry’s best thinkers discussed their work at a Research Affiliates meeting. Jason Hsu’s report emphasizes that factor-based investing is incomplete unless it’s paired with an asset-based approach.

Woe Betide the Value Investor

The excess return earned by the average investor in value mutual funds was meaningfully negative over a 23-year period when the funds themselves outperformed the market. Why don’t all value investors benefit from the value premium?

The Promise of Smart Beta

Beyond the debate over definitions, smart beta strategies can be the prime alternative to active management for our times just as cap-weighted index funds served so admirably in that role for the past four decades.

Finding Smart Beta in the Factor Zoo

The publish-or-perish syndrome and the smart beta movement have motivated academics and practitioners to come up with a spate of new factors. How can investors determine which ones are legitimate and how to use them in their equity portfolios?

Measuring the “Skill” of Index Portfolios

Investors devote significant resources to deciding whether a manager is skillful. When it comes to passive investing, they appear to lose their critical faculties.

The Value Premium is Mean-Reverting

It’s not merely interesting that the value premium tends to revert toward the long-term average; it’s strategically consequential, too.

Who Is On the Other Side of the Trade?

Value investing is uncomfortable because it goes against our genetic programming; on our evolutionary path, fear and greed probably served to keep us safe.

The Challenges of Year-End Forecasting

Many investors piled on the equity bandwagon this year, pushing prices up to dizzying heights. With current yields for U.S. equities at record lows, is it time to get off the bandwagon?

Smart Beta vs. Traditional Value Style Indices

Fundamentals-weighted index investing extracts the value premium through contrarian rebalancing in a diversified core portfolio.

Smart Beta and Benchmark Risk

The conventional ex-post risk measures of tracking error and the information ratio must be reinterpreted for Smart Beta strategies.

Smart Beta, MPT, and Diversification

Smart Beta’s efficiency comes, not from optimization, but from a more balanced distribution across equity premium sources.

Strategy Indices and Smart Betas

Active quant strategies primarily seek alpha through proprietary return forecasting. In contrast, Smart Beta strategies are a good fit for the core equity portfolio.

The Genesis of Smart Beta Investing

What is Smart Beta and how can it help investors? In the first part of a new series, CIO Jason Hsu relates Smart Beta to traditional passive and active management. 

The Impact of Tapering on Risky Assets

​The Fed has deferred tapering, but when retrenching starts, some risky assets may be more attractive than others.  Jason Hsu explores how tapering will affect financial markets.

Does Blame Predict Performance?

The science of manager selection really is about what Charley Ellis calls “the loser’s game.” So how can investors improve their odds of picking successful managers? For one thing, avoid asset managers that have a culture of blame.

A Framework for Examining Asset Allocation Alpha

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 […]

From QE to Queasy: Fiscal Policy and the Risk of Inflation

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 Risk in Risk Parity: A Factor-Based Analysis of Asset-Based Risk Parity

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 […]

The Role of Risk in Asset Allocation

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.

Why We Don’t Rebalance

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.

Selling Hope

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.

Should You Be Concerned About the Government Debt

With U.S. government debt equal to 100% of GDP, should investors be concerned? What specifically makes high government debt-to-GDP bad? How much is “too much”? Does it matter whether the debtholders are domestic buyers or foreign buyers?

Alternative Beta — The Third Choice

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.

Risk Parity Portfolio vs. Other Asset Allocation Heuristic Portfolios

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 […]

Performance Attribution: Measuring Dynamic Allocation Skill

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 […]