Cliff's Perspective

Latest Posts



  1. December 08, 2017
    • Topic:

      Fixed Income, Credit, Risk Management

    My last few entries highlighted some recent AQR papers with hopefully some interesting commentary. I know it’s a little weak to do that again so soon, but some of the papers are just too cool not to opine on. I have a particular weakness for pricking the bubble of conventional wisdom, and, much geekier, for arguments that hinge on the subtleties and great value of true diversification. This one has got it all, and I couldn’t resist discussing it.

    There is a common belief that goes something like this: “Sure active stock picking doesn’t work, but in ...

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    • Topic:

      Equities, Fixed Income

    Our new paper The Premature Demonization of Stock Repurchases dives into the topical, and controversial, issue of share repurchases. This is one of those “people get quite hysterical about but there’s much less going on here than people think” type papers. Here’s why.

    Buybacks in classical finance theory should be neutral (Modigliani and Miller). Once information asymmetries and principal-agent problems are introduced, one can argue that buybacks become a positive (they convey managers’ private information or constrain empire building). The ...

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    • Topic:

      Factor Investing, Momentum Investing, Portfolio Construction, Trading

    My colleagues’ new paper Implementing Momentum examines the real world applicability of systematic momentum investing. Momentum is one of the strongest, if not the strongest, of the major market “anomalies” documented in the literature. But most academic studies ignore real world costs and other forms of slippage when examining factors, which is likely a larger issue for momentum due to its higher turnover. The concern is that momentum is so costly to trade that its return premium is diminished in the real world.

    Some papers try to address this issue in ...

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    • Topic:

      Asset Allocation, Market Timing, Factor Investing, Value Investing, Factor Timing

    Our new paper, Deep Value, looks at episodes where the valuation spread between cheap and expensive securities is wide relative to its history. One innovation is that we do this not just for individual equities, as is most common in related studies, but also across equity index futures, currencies, and global bonds.

    You might have noticed that, for the last few years, I’ve been rather cynical about the ability to time factors using only their valuations. Reasons for my cynicism include 1) the inherent difficulty, theoretically and empirically, in market/factor ...

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    • Topic:

      Factor Investing, Market Efficiency, Research

    This entry is a book recommendation. The book is The Fama Portfolio and it should be on the shelf (after being read!1) of any serious student of finance.

    I’m about as far from unbiased as one can be without having a blood relation. I was Gene’s teaching assistant for two years starting in the antediluvian late 1980s. He was co-chair of my dissertation committee. Finally, along with my partner and co-author John Liew, I have an entry in the recommended book. Consider all this as you will. I stand by my recommendation of “Are you crazy? Go buy this right ...

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  2. 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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