Investing Research Articles

How well do mutual funds and exchange-traded funds (ETF) designed to track hedge fund indexes work? In their October 2015 paper entitled “Synthetic Hedge Funds”, Mario Fischer, Matthias Hanauer and Robert Heigermoser examine the performance of synthetic hedge funds, defined as open-end mutual funds and ETFs that explicitly employ hedge fund indexes as their primary benchmarks. They assess replication success:… Keep Reading

“Pervasiveness and Robustness of SMA Effectiveness for Stocks” summarizes research finding that long-term simple moving averages (SMA) pervasively outperform a buy-and-hold approach for U.S. stocks and stock portfolios during 1960-2011 and for seven developed stock markets during 1975-2010. Does this research, which focuses on a 24-month SMA, discover some essential cyclical nature of equity markets?… Keep Reading

Is systematic selling of equity index put or call options an attractive strategy? In their December 2015 paper entitled “Index Options Realized Returns Distributions from Passive Investment Strategies”, Jose Dapena and Julian Siri analyze equity index call and put option returns from the perspective of a seller. They view a systematic option seller as an insurance company: (1) collecting… Keep Reading

What kinds of smart beta work best? In their January 2016 paper entitled “A Taxonomy of Beta Based on Investment Outcomes”, Sanne De Boer, Michael LaBella and Sarah Reifsteck compare and contrast smart beta (simple, transparent, rules-based) strategies via backtesting of 12 long-only smart beta stock portfolios. They assign these portfolios to a framework that translates diversification, fundamental weighting and factor investing… Keep Reading

How easy is overfitting of investment strategy parameters and how much does overfitting inflate expectations? In their February 2016 paper entitled “Backtest Overfitting in Financial Markets”, David Bailey, Jonathan Borwein, Marcos Lopez de Prado, Amir Salehipour and Qiji Zhu introduce two online backtest overfitting tools: Backtest Overfitting Demonstration Tool – BODT simulates the overfitting of seasonal strategies (typical of… Keep Reading

Are high-yield government bonds good bets? In his January 2016 paper entitled “Finding Yield in A 2% World”, Mebane Faber applies a simple value metric to global government bonds. He specifies a value portfolio as the equally weighted third (Top 33%) of 30 government bonds with the highest nominal yields, reformed/rebalanced monthly. He considers two benchmarks: (1) an equally weighted portfolio of all 30 bonds… Keep Reading

Is selecting mutual funds based on strong performance over the last three years helpful (discovering fund manager skill) or harmful (signaling imminent fund strategy mean reversion)? In the February 2016 version of their paper entitled “The Harm in Selecting Funds that Have Recently Outperformed”, Bradford Cornell, Jason Hsu and David Nanigian investigate future mutual fund performance based on recent past performance relative… Keep Reading

Each year, Forbes calculates the performance of columnist recommendations assuming: (1) equal initial investments in each stock pick when published; (2) 1% trading friction for each purchase; and, (3) matching benchmark investments in the S&P 500 Index for each pick with no trading friction. Because matching benchmark investments are spread across the year, the benchmark… Keep Reading

Is outperformance of low-volatility stocks just a manifestation of the value premium (outperformance of stocks with high book-to-market ratios compared to stocks with low book-to-market ratios)? In his February 2016 paper entitled “The Value of Low Volatility”, David Blitz examines the interaction of the value premium with returns of long-only portfolios of low-volatility U.S. stocks over… Keep Reading

Financial market commentators and media sometimes cite the Economic Cycle Research Institute’s (ECRI) U.S. Weekly Leading Index (WLI) as an important economic indicator, implying that it is predictive of future stock market performance. According to ECRI, WLI “has a moderate lead over cyclical turns in U.S. economic activity.” ECRI publicly releases a preliminary (revised) WLI value with… Keep Reading