Quantitative investment researchers often seek uniquely optimal parameterizations of their strategies amongst a broad “robust” region of parameter choices. However, this ignores a critically important feature of investing – Diversification. By diversifying across many equally legitimate parameter choices – an ensemble – investors may …
Keep ReadingDiversification
Portfolio Optimization: Simple versus Optimal Methods
Our whitepaper “The Optimization Machine: A General Framework for Portfolio Choice” presented a logical framework for thinking about portfolio optimization given specific assumptions regarding expected relationships between risk and return. We explored the fundamental roots of common portfolio …
Keep ReadingDiversification – What Most Novice Investors Miss About Trend Following
The true benefit of trend following is only realized when investors take advantage of the extreme liquidity and diversity of global futures markets to trade a wide range of markets across all major asset categories. Our analysis shows that an investor would have achieved more than double the risk-adjusted performance of a median equity trend strategy by trading a diversified strategy across many diverse markets.
Keep ReadingCapital Efficiency Trumps Fees in the Search for Portfolio Diversifiers
The article below illustrates how capital efficiency, taxes, and fees impact portfolio choices given what we feel to be reasonable assumptions. However, we recognize that you may have different views on these variables.
Keep ReadingMeasuring Tactical Alpha, Part 1
Grinold linked investment alpha and Information Ratio to the breadth of independent active bets in an investment universe with his Fundamental Law of Active Management. Breadth is often misinterpreted as the number of eligible securities in a manager’s investment universe, but this ignores the impact of correlation.
Keep ReadingForget active vs. passive. It’s all about factors
We just love a good debate, and there seems to be quite a heated debate at the moment about the relative utility of passive versus active investing. Perhaps this debate is as timeless as investment management itself, but a flurry of recent studies may have finally armed passive advocates with enough ammunition to settle the argument once and for all.
Keep ReadingSetting Expectations for Monthly Trading Systems
Systematic researchers overwhelmingly use monthly holding periods to test strategies. This is probably driven by the availability of long-term monthly total return data for a wide variety of indexes, where daily data is more scarce. This is fine to a point, but investors may not be aware of just how sensitive results might be to day-of-the-month effects which may not persist out of sample.
Keep ReadingOne Factor to Rule Them All
Over the past few years there has been a loud and persistent chorus of complaints from market participants about the fact that markets are behaving like simple ‘risk on, risk off’ discounting mechanisms, where almost all of the risk seems to be emanating from a very small number of sources.
Keep ReadingDynamic Asset Allocation for Practitioners Part 5: Robust Risk Parity
In our article on Structural Diversification we explored the idea of holding a universe of assets which, when assembled in thoughtful proportion, might be expected to protect investors against the four major market regimes that they might encounter over the long term.
Keep ReadingStructural Diversification for All Seasons
Now that we are hip deep in our Dynamic Asset Allocation for Practitioners series (Parts I, II and III), it’s become evident that we may have skipped over some fundamental concepts in our rush to explore the more juicy material. This next series of posts is intended to lay the groundwork for how we think about the broader asset allocation problem.
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