Many of the current articles that are critical of hedge funds may be giving good advice, but for the wrong reasons.
First, I must issue a disclaimer. This is for wonks already immersed in the factor literature. There's lots of inside baseball, assumed terminology, etc., in this one. I explain what I’m doing along the way, but rarely from scratch. If this stuff is brand new to you and you still understand it all you are way smarter than me (you are allowed to find that to be faint praise). There’s nothing more mathematical here than a regression model but there is lots of shop talk. So, if "factor wonk" doesn't describe you, you probably have friends and a social life, so that’s nice, but this piece won't make much sense (consider it even).
It seems that now everyone wants to time factors. Indeed, we’d love to as well if we thought it was a very useful endeavor. But, although tempting, in an editorial piece for a special upcoming Journal of Portfolio Management issue focused on quantitative investing — written at the kind request of long-time editor, Frank Fabozzi — I argue that this tempting siren song should be resisted, even if I know some will be disappointed with this view.
The recent Sanford Bernstein research note calling indexing “worse than Marxism,” created quite the kerfuffle. In my Bloomberg op-ed article, I discuss how the Bernstein note, while perhaps kick-starting some valuable discussions in the world of finance, missed, or at least minimized, something much more important — free riding on price signals is not a bug of Capitalism to be exploited by “greedy red indexers,” but instead may be the most important feature of Capitalism.
If you’re still hawking the story that the original results of Fama and French, Jegadeesh and Titman, Lakonishok, Vishny and Shleifer — and even yours truly and others — were the result of data mining, you have been completely defeated on the field of financial battle, and you must stop.
"Two-step" bets — where investors try to profit from macroeconomic events by anticipating which companies or currencies the events will most likely affect — are usually a bad idea, or at least much less likely to work out than the original macro insight. Here's why.