Vol. 17, No. 3, 2019 Aaron Brown and Richard Dewey We set out to investigate whether “Bond King” Bill Gross demonstrated alpha (excess average return after adjusting for market exposures) over his career, in the spirit of earlier papers asking the same question of “Oracle of Omaha,” Warren Buffett. The journey turned out to be… Read more
Articles
Return Predictability and Market-Timing: A One-Month Model
Vol. 17, No. 3, 2019 Blair Hull, Xiao Qiao and Petra Bakosova We use weighted least squares to combine 15 diverse variables to build a predictive model for the one- month-ahead market excess returns.We transform our forecasts into investable positions to form a market-timing strategy. From 2003 to 2017, our strategy had 16.6% annual returns… Read more
Embedded Betas and Better Bets: Factor Investing in Emerging Market Bonds
Vol. 17, No. 3, 2019 Johnny Kang, Kevin So and Thomas Tziortziotis We document novel empirical insights driving the prices of sovereign external emerging market bonds. In the time series, we examine the market portfolio’s time-varying exposures to a broad set of macro factors (rates, credit, currency, and equity) and identify these embedded betas as… Read more
How to Beat the Machines Before They Beat You
Vol.17, No.3, 2019 Vineer Bhansali The use of “big” data, algorithms and machine learning is disrupting investment management. By carefully selecting domains where data is sparse and there is possibility of regime changes, a human investor can not only survive, but also thrive in a world of investment machines… Read more
Does Trading by ETF and Mutual Fund Investors Hurt Performance? Evidence from Time- and Dollar-Weighted Returns
Vol.17, No. 3, 2019 Ananth Madhavan and Aleksander Sobczyk This paper analyzes the “return gap” between internal rate of returns that account for intermediate investor flows (“dollar-weighted returns”) and more familiar buy-and-hold returns that funds typically must report. Our sample constitutes all US-domiciled open- end mutual funds and exchange-traded funds (ETFs), and covers both fixed… Read more
Optimal Holdings of Active, Passive and Smart Beta Strategies
Volume 17, No. 2, 2019 Edmund Bellord, Joshua Livnat, Dan Porter and Martin B. Tarlie The growing dominance of the core and explore model — a large passive index combined with a collection of high tracking error satellite portfolios — in conjunction with the growth of factor investing has renewed interest in how to allocate… Read more
Automated Financial Management: Diversification and Account Size Flexibility
Volume 17, No. 2, 2019 Michael Reher and Celine Sun We study the value added of automated financial management (AFM) services along two dimensions: diversification and account size exibility. First, using a company-specific experiment with matched AFM and traditional portfolios, we find that AFM portfolios are significantly better diversified. Underdiversified investors are more likely to… Read more
A Model of Bond Value: Explaining Yields with Growth and Inflation
Volume 17, No. 2, 2019 Thomas Shevlin This paper looks to establish a new heuristic for investors, giving them a simple, intuitive way to relate bond yields to prevailing trends in growth and inflation. The model offers an alternative to forecasting surveys, which have been over-estimating 10-year Treasury yields for decades and continue to project… Read more
Quantifying the Skewness Loss of Diversification
Volume 17, No. 2, 2019 James X. Xiong and Thomas M. Idzorek Diversification is widely viewed as the “only free lunch” of finance. Unbeknownst to the free lunch crowd, skewness is typically positive for individual stocks and negative for diversified portfolios and thus diversification is not free. This undesirable move from positive to negative skewness… Read more
A Portfolio Approach to Accelerate Therapeutic Innovation in Ovarian Cancer
Volume 17, No. 2, 2019 Shomesh Chaudhuri, Katherine Cheng, Andrew W. Lo, Shirley Pepke, Sergio Rinaudo, Lynda Roman and Ryan Spencer We consider a portfolio-based approach to financing ovarian cancer therapeutics in which multiple candidates are funded within a single structure. Twenty-five potential early-stage drug development projects were identified for inclusion in a hypothetical portfolio… Read more