Objective research and reviews to aid investing decisions
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For complete reverse chronological listings of blog entries, see: External (Secondary) Research for summaries of research done by others; Original (Primary) Research for summaries of our own work; and, Reviews for a few discussions of books, web sites and products.
Can investors count on continued outperformance from hedge funds with exceptionally strong recent returns? In their July 2008 paper entitled "The Performance Persistence of Equity Long/Short Hedge Funds", Markus Schmid and Samuel Manser apply a flexible portfolio-based approach to investigate the persistence of raw and risk-adjusted returns for long/short equity hedge funds. Using return and holdings data for 1,150 long/short equity hedge funds over the period 1994-2005, they conclude that:
The following chart, taken from the paper, shows the alphas of ten portfolios of long/short equity hedge funds sorted on alpha achieved over the two years before formation. Most of the differences in past performance disappear after portfolio formation. However, abnormal performance persists significantly over one year for the top-performing portfolio and two years for the bottom-performing portfolio. Results demonstrate that the top-performing portfolio must be reformed annually to capture persistence over time.
In summary, long/short equity hedge fund investors, if they have the flexibility, may be to able capture future alpha by chasing past alpha.
For related research, see Blog Synthesis: Mutual Funds and Hedge Funds.
How should investors view corporate earnings estimates as determinants of stock valuations? Are analyst and management forecasts of any value? Is high growth inherently unsustainable? Is the source of growth important? In his June 2008 paper entitled "Growth and Value: Past Growth, Predicted Growth and Fundamental Growth", Aswath Damodaran examines the patterns and broad lessons of research on growth forecasts. Using results from past studies and new analyses of earnings data for 1997-2007, he concludes that: More...
How do the corporate experts most responsible for assessing the cost of equity currently feel about future stock returns? In their July 2008 paper entitled "The Equity Risk Premium in January 2008: Evidence from the Global CFO Outlook Survey", John Graham and Campbell Harvey provide an updated report on the views of U.S. Chief Financial Officers (CFOs) on the prospective equity risk premium relative to the yield on 10-year U.S. Treasury notes (T-notes), assuming a 10-year investment horizon. After analyzing 388 responses to the 32nd quarterly survey on this topic, they find that: More...
Our Test Strategy attempts to exploit the value premium, the size effect, the turn-of-the-month effect and the volatility premium embedded in index options. The strategy has outperformed buy-and-hold, achieving a small gain during a mostly declining market over the past 16 months. How has each premium/effect contributed to strategy performance? Using strategy account and benchmark data over the period 3/16/07 through 7/11/08, we find that: More...
Just how much do investors in U.S. equities pay for the hope of beating the market? In his April 2008 paper entitled "The Cost of Active Investing", Kenneth French estimates the cost of active investing in the U.S. stock market as the difference between the total cost of investing and an estimate of the cost if everyone invested passively. He constructs the total cost of investing as the sum of four components: (1) fees/expenses investors pay for open-end, closed-end and exchange-traded funds; (2) investment management fees for institutional investors; (3) fees investors pay for hedge funds and funds of hedge funds; and, (4) costs all investors pay to trade. Using data for investing costs and market returns during 1980-2006 for NYSE, Amex and NASDAQ stocks, he concludes that: More...
Are prominent stock market bloggers in aggregate able to predict the market's direction? The Ticker Sense Blogger Sentiment Poll "is a survey of the web's most prominent investment bloggers, asking 'What is your outlook on the U.S. stock market for the next 30 days?'" (bullish, bearish or neutral) on a weekly basis. The site currently lists 21 active prognosticators. Participation has varied over time. Based on results from Guru Grades and other stock market sentiment studies, we hypothesize that blogger sentiment: (1) tends to react to what just happened in the stock market; and, (2) does not predict stock market behavior. Using the 102 aggregate measurements from the poll since inception, we find that... More...
A reader inquired about the validity of Martin Zweig's Four Percent Model Indicator, which states:
"The Four Percent Model Indicator uses the...weekly close of the Value Line Index. A buy signal is generated when the index rises four percent or more from the previous week. Similarly, a sell signal is indicated when the index falls four percent or more from the previous week."
Does the rule really work? Using weekly closes of the Value Line Arithmetic Index over the period 5/4/84 (the earliest available) through 7/11/08, we find that: More...
Do any indicators systematically predict stock returns across global equity markets? In his June 2008 paper entitled "Predicting Global Stock Returns", Erik Hjalmarsson tests the power of four common indicators (dividend-price ratio, earnings-price ratio, short interest rate and term spread) to predict stock returns for markets in 24 developed and 16 emerging economies. Using a very large dataset encompassing 20,000 monthly observations of returns and indicators ranging as far back as 1836, he concludes that: More...
How stable are the quarterly aggregate operating earnings growth forecasts for the S&P 500? What has the trend in these forecasts been lately? Using the earnings forecasts published every one to two weeks by Standard and Poor’s (and by Reuters until recently discontinued) for the eight quarters of 2007 and 2008 over the period 5/15/06 through 7/9/08, we find that: More...
Do expense ratios for actively managed equity mutual funds represent pay for performance or pay for something else? In their July 2008 paper entitled "Performance and Characteristics of Actively Managed Retail Mutual Funds with Diverse Expense Ratios", John Haslem, Kent Baker and David Smith investigate factors determining the performance of actively managed retail equity mutual funds, with emphasis on expense ratios. Using characteristics and return data for 1,779 actively managed U.S. equity mutual funds segmented by Morningstar category and contemporaneous returns for category-matched Russell indexes, they conclude that: More...
