Cliff's Perspective

Latest Posts



  1. September 15, 2017
    • Topic:

      Portfolio Construction, Style Investing

    My colleagues have produced a paper on something we call, perhaps pretentiously though we can’t come up with a better word for it, “craftsmanship” — what we believe to be a necessary part in creating successful factor portfolios. What factors (value, momentum, small, quality, others?) you believe in, or dismiss, gets much of the attention. That’s understandable and appropriate. But we think there are many smaller decisions that each can matter some, and collectively can matter a lot. I won’t repeat the analysis and examples from the ...

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    • Topic:

      Factor Investing, Equity Investing, Portfolio Trading, Factor Timing

    This month is the ten-year anniversary of the "quant crisis" or "quant quake" - that one week period in August 2007 when quantitative equity strategies like factor investing and statistical arbitrage suffered very large losses and then, in the next few weeks, made an almost full recovery. Given the current popularity of factor investing it seems a good time to review what happened that summer and discuss its relevance for today.

    Following closely on the heels of the event, in September 2007, I did a write-up of what we thought happened. It took the form of an interview ...

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    • Topic:

      Market Volatility, Portfolio Management, Risk Management

    If anyone reading this has always meant “recent realized return volatility” when commenting on the VIX, and has never attached much importance to it beyond that, please stop reading as the below has little point for you. But if you think the VIX is much deeper than that, read on!

    It has become quite commonplace to note that the VIX is very low and to worry about it. Indeed, the VIX really is very low right now (i.e., less than 1st percentile low). I tend to think this is less of a worry than most (not that there aren’t other nice things to worry about, ...

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    • Topic:

      Factor Investing, Portfolio Trading, Style Investing

    In his latest whitepaper, Rob Arnott is still repeating things like this: “We point out that some of these factors owe much (or all) of their past efficacy to rising relative valuations.” It’s not a minor assertion but one of his central themes. It was the main topic of the first major paper in his recent wave of “most of the factors are overpriced, data mined, and doomed, save only for the value factor which I still occasionally rename and claim as my own” series, and he returns to it here.

    I have lots of disagreements with Rob on a variety ...

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    • Topic:

      Equities

    With the FANGs (née FAANGs, née FAAMGs) in the news again, for good and bad, we thought it would be a good time to update our analysis that first looked back at 2015. Once again, we find less going on than first meets the eye. Let me try a sports analogy. It’s always interesting to report who won the Super Bowl. But, it’s not at all interesting to report that someone won the Super Bowl. Now, it would indeed be interesting to report if the winning team did something truly outsized like post a 19-0 record for the season. A lot of the reporting of ...

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    • Topic:

      ESG

    Negative screening is a common application of Environmental/Social/Governance (ESG) investing. It avoids “sin stocks” and divests from industries or firms deemed immoral or having poor or undesirable standards along one of the three E, S or G dimensions.1 It’s promoted largely on the fact that it’s virtuous. While we may all define virtue differently, advocating for it in this way is fair and appropriate. However, employing these constraints is also often promoted as enhancing expected returns. That is, if you avoid certain companies, industries, ...

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    • Topic:

      Factor Investing, Style Investing, Data

    We are the whipping boy for a recent article on the dangers of data mining in our field. And the whipping is delivered largely based on an unsupported shot taken by my frequent foil and sparring partner, Rob Arnott. Before I take on this attack1 we need to back up a bit.

    Data mining, that is searching the data to find in-sample patterns in returns that are not real but random, and then believing you’ve found truth, is a real problem in our field. Random doesn’t tend to repeat so data mining often fails to produce attractive real life returns going forward. And ...

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  2. March 15, 2017
    • Topic:

      Factor Investing, Style Investing

    Here is the latest and most exhaustive in our ongoing attempt to ruin the fun for those who think contrarian factor timing is easy and for those who think current factor valuations are extreme, in spite of all of the evidence to the contrary for both.1

    When you write a philippic on something, you generally hope you have put the matter to rest.2 But, my philippic was admittedly designed to be lighter on data (not bereft, just lighter) and heavier on argument. Our latest paper provides a lot of both. Still, much of the basic intuition remains the same.

    I’d sum up ...

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    • Topic:

      Corporate Governance

    In this editorial, in the Wall Street Journal no less, two accomplished executives who should know far better argue not to expense stock options for employees making less than $100,000 a year. Why not also ignore the wage expense of these same employees? I will explain. It's obvious idiocy. Ok, maybe I'll explain a bit more. An expense is an expense. If you want to help "inequality," go for it, but do it honestly and directly not by warping the accounting system and bending rules you still (incredibly) object to and would obviously discard in total if allowed (it's obvious ...

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  3. February 12, 2017
    • Topic:

      Factor Investing, Style Investing

    Our latest paper Betting Against Correlation tries to look deeper into what drives the low-risk effect. In short, we create a new priced factor that helps distinguish between competing, and confounding, stories explaining the efficacy of low-risk investing.

    Recall that the low-risk effect is the tendency for low-risk assets to do better than they should versus high-risk assets. That’s a loaded sentence as I haven’t defined risk or how we should measure “better than they should.” When it comes to the low-risk effect, risk has been measured in many ...

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