We develop a novel approach to separate alpha and beta under model misspecification. It comes with formal tests to identify less misspecified models and sharpen the return decomposition of individual funds. Our hedge fund analysis reveals that: (i) prominent models are as misspecified as the CAPM, (ii) several factors (time-…

FX forward-implied carry is a valid basis for trading strategies because it is related to divergences in monetary and financial conditions. However, nominal carry is a cheap and rough indicator: related PnLs are highly seasonal, sensitive to global equity markets, and prone to large drawdowns. Simple alternative concepts…

Acknowledging and explaining the difficulties inherent in traditional asset allocation, these authors then provide a framework for asset allocation that is based on extended diversification. It provides risk management through diversification to not only control risk but to add value. Specifically, the framework finds…

Liquid alternatives products often offer the allure of returns that could benefit most portfolios - equity-like returns with lower market beta. Many managers in the sector are able to deliver that kind of outcome, but once these managers take their cut, most of these products go from making sense to being a bad deal.

In 2015 three academics, in conjunction with a smart beta ETF provider, published a set of research papers that showed that between January 1969 and December 2014 adopting alternative approaches to index construction produced better returns than a conventional market cap weighting methodology.1 A market cap based scheme was…

Many investors have achieved infrastructure exposure exclusively through the private markets, yet the asset class can also be accessed through listed infrastructure equity strategies. In today’s market environment, the liquidity, diversification, and valuation transparency of listed infrastructure make it an increasingly…

One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relationship between risk and return. However, empirical studies have found the actual relationship to be basically flat, or even negative. In addition, defensive strategies, at least…

With continued strong inflows into hedge fund strategies, it is imperative for researchers to study if hedge funds are still worth their high fees. In an updated and comprehensive study covering both North American and Asian hedge funds, the authors find market risk factors explain up to 81% of hedge fund portfolios’…

Investors can construct commodity benchmarks better aligned with their investment objectives. This is important because common “plain-vanilla” benchmarks, constructed to mimic relative production activity, may be inconsistent with a CIO’s objectives. CIOs can use the Real Asset Sensitivity Analysis (RASA) framework to…

EDHEC-Risk Institute conducted its 12th survey of European investment professionals about the usage and perceptions of ETFs, smart beta and factor investing, as part of the Amundi research chair at EDHEC-Risk Institute on “ETF, Indexing and Smart Beta Investment Strategies”. The aim of this study is to analyse current…

The concept of factor investing and the debate around passive and active management has emerged since the end of the 2000s and has completely changed the landscape of equity investing. Today, institutional investors structure their strategic equity allocations essentially around risk factors. Size, value, low beta, momentum…

Investment firms face a future in which change is accelerating

In this interactive report, we set out the changing landscape for investment management and analyze how firms can adapt their models to succeed in the future environment. The report is informed by a survey of CFA Institute members. Among those surveyed,…

The efficient market hypothesis (EMH) continues to be embraced as the preeminent model of financial markets. The rapid growth in assets managed by strategies this theory underpins – namely, index tracking, risk premia and smart beta − reflects the consensus it has achieved among investment professionals. Yet the EMH often…

What is the best market-neutral implementation of classical Equity Factors? Should one use the specific predictability of the short-leg to build a zero beta Long-Short portfolio, in spite of the specific costs associated to shorting, or is it preferable to ban the shorts and hedge the long-leg with, say, an index future? The…

In this video, François-Serge Lhabitant, PhD, Affiliate Professor at EDHEC-Risk Institute delves into the worlds of hedge funds and alternative betas, comparing the two and raising some important questions along the way for investors to consider.

In this paper, S&P Dow Jones Indices take a new look at commodities as an asset class and at its uses in a portfolio, which historically have been diversification and inflation protection.They analyze different commodity beta allocations. Finally, they identify alternative investment uses of commodities, including as…

Nobel prize laureate Eugene Fama and fellow researcher Kenneth French have revamped their famous 3-factor model by adding two new factors to analyze stock returns: Profitability and Investment. But this 5-factor model raises many questions.

Speed read

• The 5-factor model still ignores Momentum and Low…