Factor/Style Investing

Uncorrelated Assets: An Important Dimension of an Optimal Portfolio

Recently, Dimensional Fund Advisors wrote critically on “liquid alts.” They make some good points, but they also draw some odd conclusions that if applied more generally would not be to their or our liking. Besides discussing their piece, below I also review the general rationale behind holding uncorrelated assets – in particular, equity “factors” held in a long-short manner.

Alternative Investing

Volatility Laundering

While not alone, I have become one of the chief gadflies of the private equity industry. But I’m a selective gadfly. The illiquidity and non-marking that comes with private investments used to be acknowledged as a bug. These days, however, this same bug is sold as a feature – and sometimes, as in a recent Institutional Investor op-ed, brazenly so. My response in II covers what I think are the increasingly harmful ramifications of taking as reality the unrealistically smoothed returns that private strategies are all-too-happy to report.

Factor/Style Investing

The Bubble Has Not Popped

This post updates our value spread with data through the end of 2022. The fourth quarter of 2022 saw value recover from the bout of temporary insanity that gripped some portion of the market over the summer, but the spread ends 2022 very much still in rarified territory – at the 94th percentile, to be precise. More excitingly for 2023, value’s returns in 2022 were extremely strong, and the spread only moved from roughly the 100th percentile to the 94th, which makes us very optimistic about the prospects of continued normalization in 2023 and beyond.

Factor/Style Investing

Value Spreads Are Back to Tech Bubble Highs: Is Everyone Out There Cray-Cray?

This adds another three months of data to the May entry in our series of value spread updates. Over the past two months, some portion of the market went temporarily (I hope) insane, punishing value, as we measure it, to the point where the value spread has retraced most of its modest gains since the beginning of the year. The world doesn’t steadily move a little bit towards what we think is rational each day – painfully for us, it’s not a linear process. But this changes nothing about our belief in the outlook for value.

Factor/Style Investing

Still Crazy After All This YTD

Over these additional three months, value’s returns, as we measure them, have continued apace. Since February, the value spread has fallen slightly, though it remains near its tech bubble peak, at around a 95th percentile. Reminder — a massive valuation dislocation says very little about the timing of when it falls back to earth. But it’s nice to see it start and still leave the spread incredibly high.

Alternative Investing

Everything and More

My colleague and former classmate Antti Ilmanen is at it again with his second book, Investing Amid Low Expected Returns. Very rarely does a sequel stand up to the original (see Jaws II), but that's certainly not the case here!

ESG Investing

Shorting Counts

Man Group recently wrote an op-ed titled “Short-selling does not count as a carbon offset.” Of course we agree it doesn’t. But the headline is quite misleading if taken to mean shorting has no role in the fight to reduce carbon emissions. Shorting does exactly what it’s supposed to do – raise the cost of capital to the emitters, even more so than divestment.

Factor/Style Investing

That’s It, That’s the Update

Over these past two months, value’s returns, as we measure them, have been incredibly strong. This has killed the value spread. That is, it’s about as high as it was in the tech bubble. Just not as high as a few months ago. Yes, “killed” was sarcasm.

ESG Investing

Shorting Your Way to a Greener Tomorrow

It would be an understatement to say there is confusion in the industry about the use of shorting in an ESG context. When it comes to calculating a portfolio’s ESG score, we have heard arguments ranging from "ignore the shorts” to “net them against longs,” and, my favorite as it’s creatively insane, “pretend the shorts are actually longs.” This note explains why it is critical that shorts be properly accounted for, so that investors can use shorting to reduce carbon exposure, to get to net zero or to achieve other ESG goals.

Value

The Valuesburg Address

One score and eight years ago Fama and French brought forth on this world, a new factor, conceived in either risk or behavioral effects, and dedicated to the proposition that all portfolios are not created equal. Now we are engaged in a great drawdown, testing whether investors in that factor, or any factor so conceived and so dedicated, can long endure…

Fixed Income

Bonds Are Frickin' Expensive

When something as important as the U.S. bond yield hits historical extremes, it’s worth at least a discussion. Cliff examines the long-term relationships between real bond yields, real T-bill yields, the slope of the yield curve, and economic conditions.