Betting Against Beta strategies using option-implied correlations

A estratégia Betting Against Beta (BAB) oferece retornos ajustados ao risco muito altos, superando outras estratégias baseadas em fatores como o mercado, tamanho, valor, momentum, entre outros. A recente literatura (Barroso & Maio, 2018) constata que a gestão de risco da estratégia BAB (Risk-managed BAB) possibilita um ganho substancial em Sharpe ratio. No entanto, ao contrário da gestão de risco da estratégia momentum, a gestão de risco da estratégia BAB apresenta um elevado potencial de perda. Nesta dissertação, o objetivo é melhorar o perfil risco-retorno da estratégia BAB, reduzindo, principalmente, o seu potencial de perda. Com isto em mente, concentramo-nos na construção de uma estratégia BAB otimizada. Pela primeira vez na literatura de estratégias BAB, usamos informação implícita nos preços de opções sobre um índice acionista de referência (S&P500) acerca da correlação esperada dos retornos dos seus constituintes. Na linha do recente trabalho (Nogueira & Faria, 2017) acerca de estratégias momentum, usamos uma média móvel a 2 meses como um proxy da estrutura temporal dessas expectativas. Propomos uma nova estratégia, a estratégia Dynamic BAB, que tem um desempenho substancialmente melhor que a versão original. Em particular, otimiza a exposição ao potencial de ganho do BAB, minimizando a exposição ao potencial de perda. Além disso, para aumentar ainda mais a exposição ao potencial de ganho, combinamos a Dynamic BAB com a estratégia de gestão de risco de (Barroso & Maio, 2018) (Risk-managed BAB). Denominamos a estratégia resultante de Hybrid BAB. Ao testar a sua robustez, é de notar que a Hybrid BAB pode ser implementada em tempo real, usando apenas informação disponível no momento do trading. Além disso, a estratégia mostra-se robusta a mudanças nos pesos do fator. A estratégia Hybrid BAB oferece retornos com o dobro do Sharpe ratio da estratégia BAB original, permitindo concluir que, à semelhança do reportado em (Nogueira & Faria, 2017) para estratégias de momentum, também existe informação relevante a ser explorada nos preços de opções sobre índices acionistas de referência que contribuem para o desenho e implementação de estratégias BAB.The Betting Against Beta (BAB) strategy offers very high risk-adjusted returns, outperforming other strategies based on factors as the market, size, value, momentum, and others. Recent literature of (Barroso & Maio, 2018) finds that managing the risk of the BAB strategy ( Risk-managed BAB) allows a substantial gain in Sharpe ratio. However, unlike Risk-managed momentum, Risk-managed BAB has a large downside risk. In this dissertation, the objective is to improve the BAB strategy risk-return profile, particularly by reducing its downside risk. With that in mind, we focus on the construction of an optimized BAB strategy. For the first time in the BAB related strategies literature, we use implied information on the S&P500 index option-implied correlation of its constituents returns. In line with the recent work (Nogueira & Faria, 2017) about momentum strategies, we use a 2-month moving average as a proxy for the term structure of expected correlations in the S&P500 index. We propose a new strategy, Dynamic BAB strategy, that has a substantially better performance than the original version. Particularly, it optimizes the exposure to the BAB upside risk, reducing the exposure to its downside risk. Additionally, to increase even more the upside potential, we combine the Dynamic BAB strategy with the Risk-managed BAB strategy of (Barroso & Maio, 2018). We denominate the resulting strategy Hybrid BAB strategy. Testing for its robustness, the Hybrid strategy can be implemented in real-time, only using available information in the moment of the trading. Moreover, the strategy is robust to changes in the weights. The Hybrid BAB strategy provides returns with a Sharpe ratio that almost doubles one of the original BAB, allowing to conclude that, similarly with the reports in (Nogueira & Faria, 2017) for the momentum strategies, there is also relevant information to be explored in the option prices of equity indexes that contribute to build and implement BAB strategies

Momentum strategies using option-implied correlations

Em geral, o perfil risco-retorno da estratégia de momentum é como uma ‘faca’ de dois gumes. Por um lado, a estratégia oferece elevados retornos ajustados ao risco que superam os proporcionados pelas estratégias assentes nos fatores de mercado, value ou size. Mas, por outro lado, este notável desempenho é condicionado por uma elevada exposição ao risco de ‘crash’. i.e., risco de perdas muito elevadas apesar de pouco frequentes. Nesta dissertação pretendemos otimizar a implementação de uma estratégia de momentum no mercado acionista americano (NYSE, NASDAQ e AMEX). Para o efeito utilizamos, pela primeira vez na literatura, informação implícita nos preços de opções sobre um índice acionista de referência (S&P500) acerca da correlação esperada de retornos dos constituintes desse índice. Concluímos que utilizando a média móvel de 2 meses de uma proxy da estrutura temporal dessas expectativas para ajustar a exposição ao fator momentum, é possível melhorar significativamente o desempenho do momentum. Denominamos esta estratégia como Dinâmica. Esta estratégia melhora o potencial de ganho do momentum, mas mantém uma elevada exposição ao risco de ‘crash’ do momentum. Para ultrapassar este facto, propomos uma estratégia alternativa, que denominamos de Híbrida, a qual combina a estratégia Dinâmica com a estratégia ‘Risk-managed’, proposta por Barroso e Santa-Clara (2015). A estratégia Híbrida pode ser implementada em tempo real (i.e., apenas utiliza informação disponível até ao momento presente), apresenta retornos com ‘skewness’ positiva, e um ‘Sharpe ratio’ que mais do que triplica face ao da estratégia simples de momentum.Generically, the risk-return profile of momentum strategies is a double-edged sword. On one hand, the strategy offers very attractive risk-adjusted returns, frequently outperforming those of strategies based on the market, value, or size factors. However, momentum strategies are highly exposed to the ‘crash’ risk, i.e., severe downside risk in rare occasions. In this dissertation, we aim to improve the implementation of a momentum strategy in the U.S. equity market (NYSE, NASDAQ and AMEX). With that purpose, and for the first time in the literature, we make use of information on the S&P500 index option-implied correlation of the index constituents returns. We conclude that by using the 2-month moving average of a proxy for the term structure of expected correlations across the S&P500 index constituents, implied in their option prices, it is possible to improve significantly the performance of momentum strategies. We denominate this strategy as Dynamic momentum strategy. It optimises the exposure to the upside potential of the momentum factor but continues to be exposed to the momentum’s crash risk. In order to manage this risk exposure, we propose another momentum strategy which we denominate by Hybrid momentum strategy, which combines the Dynamic momentum strategy and the Risk-managed momentum strategy, as proposed by Barroso and Santa-Clara (2015). This Hybrid momentum strategy can be implemented on real-time (i.e. only uses information available to the trader), generating returns with positive skewness and a Sharpe ratio that more than triples versus that of the plain-vanilla momentum strategy

What Is an Index?

Technological advances in telecommunications, securities exchanges, and algorithmic trading have facilitated a host of new investment products that resemble theme-based passive indexes but which depart from traditional market-cap-weighted portfolios. I propose broadening the definition of an index using a functional perspective—any portfolio strategy that satisfies three properties should be considered an index: (1) it is completely transparent; (2) it is investable; and (3) it is systematic, i.e., it is entirely rules-based and contains no judgment or unique investment skill. Portfolios satisfying these properties that are not market-cap-weighted are given a new name: “dynamic indexes.” This functional definition widens the universe of possibilities and, most importantly, decouples risk management from alpha generation. Passive strategies can and should be actively risk managed, and I provide a simple example of how this can be achieved. Dynamic indexes also create new challenges of which the most significant is backtest bias, and I conclude with a proposal for managing this risk

Funktionsweise und Replikationstil europäischer Exchange Traded Funds auf Aktienindices

Exchange Traded Funds (ETF) were established in Europe in 2000 and have grown to a size of over 200 bn US$. Some issuers use a full replication strategy while others prefer a swap based approach. The ETF are dealt parallelly in the primary and in the secondary market, as new ETFs can be created at any time. Therefore, the market is very liquid with small ask bid spreads. The fees are considerably lower compared to active managed fonds. For liquid share indices both strategies can replicate the index convincingly. In the EUROSTOXX the ETF can outperform the Index due to dividend and tax optimization. This was not possible for the Dax. For illiquid large indices (MSCI Emerging Markets), there was a considerable difference between the monthly returns of the index compared to the ETFs. Both strategies have counterparty risk. The full replication uses security lending to enhance the performance. The synthetic strategy can have losses up to 10% if the swap partner defaults. --ETF,Exchange Traded Funds,Full Replication,Swap Replication,ETF Performance,ETF Risk

Investment Manager Characteristics, Strategy and Fund Performance.

This dissertation presents five research essays evaluating the performance of managed funds in light of the investment strategy and manager characteristics exhibited by institutional investment companies. An analysis of investment performance with respect to a fund managers strategy provides important information in determining whether performance objectives have been achieved. There are a number of different types of investment strategies managed funds may adopt. However, the primary dichotomy is on the basis of whether the portfolio manager implements either an active or index approach. Active managers attempt to outperform the market through the use of price-sensitive information, whereas a passive manager's objective is to replicate the returns and risk of a target benchmark index. The evaluation of investment manager characteristics is also evaluated. This is motivated on the basis that asset management entities place significant emphasis on both the articulation and differentiation of their investment style relative to competitors, and selling the strengths of their portfolio management skills (in terms of past performance) as well identifying the key individuals comprising their investment team and their unique attributes. For active equity managers, the methods used in constructing portfolios and implementing the investment strategy include security selection, in terms of 'top-down' or 'bottom-up' strategies, value-biased, growth-biased or style-neutral strategies, and portfolios exhibiting market capitalisation biases (i.e. preferences to large or small-cap securities). In terms of active bond portfolio management, the most common strategies include duration management and yield curve positioning. Active managers' strategies are likely to extend beyond stock selection, in particular, where the fund manager adjusts the portfolio's composition in anticipation of favourably capitalising on future movements in the market. For index managers, replication of both the returns and risk of the underlying index may be achieved through either full-replication of constituent stocks comprising the index, or through non-replication techniques (stratified sampling and/or optimisation). Each essay provides a unique contribution to the literature with respect to the performance of active and index funds, as well as an analysis of funds that invest specifically in domestic equities, domestic fixed interest, and diversified funds that invest across the broad spectrum of asset classes. The origins of the performance evaluation literature are ascribed to Cowles' (1933) pioneering work, and the literature has given increasing attention to the topic. However the most fundamental issue considered in almost all previous studies of managed fund performance is the extent to which actively managed portfolios have earned superior risk-adjusted excess returns for investors. The literature has overwhelmingly documented (with a small number of exceptions) that active funds have been unable to earn superior returns, either before or after expenses (e.g. Jensen (1968), Elton et al. (1993), Malkiel (1995), Gruber (1996)). While the international evidence is supported by the few Australian managed fund studies available, Australian research remains surprisingly scarce. This is perplexing considering the sheer size of the investment industry in Australia (around $A717 billion as at 30 June 2001) and the importance placed on the sector with respect to successive Federal Governments' retirement income policies. The objectives of this dissertation therefore involve an analysis of managed fund performance with respect to differences in investment strategies (i.e. active and index), as well as providing an analysis of funds invested in equities, bonds and diversified asset classes (or multi-sector portfolios). The first essay evaluates the market timing and security selection capabilities of Australian pooled superannuation funds. These funds provide institutional investors with exposure to securities across many different asset classes, including domestic and international equities, domestic and international fixed interest, property and cash. Surprisingly, the specific analysis of multi-sector funds is scarce in the literature and limited to Brinson et al. (1986, 1991), Sinclair (1990), and Blake et al. (1999). This essay also evaluates performance for the three largest asset classes within diversified superannuation funds and their contribution to overall portfolio return. The importance of an accurately specified market portfolio proxy in the measurement of investment performance is demonstrated, where the essay employs performance benchmarks that account for the multi-sector investment decisions of active investment managers in a manner that is consistent with their unique investment strategy. This approach rectifies Sinclair's (1990) analysis resulting from benchmark misspecification. Consistent with the literature, the empirical results indicate that Australian pooled superannuation funds do not exhibit significantly positive security selection or market timing skill. Given the evidence in the literature surrounding the inability of active funds to deliver superior returns to investors, lower cost index funds have become increasingly popular as an alternative investment strategy. Despite the significant growth in index funds since 1976, when the first index mutual fund was launched in the U.S., research on their performance is sparse in the U.S. and non-existent in Australia. The second essay provides an original analysis of the Australian index fund market, with specific analysis applicable to institutional Australian equity index funds offered by fund managers. While indexing is theoretically straightforward, in practice there exist potential difficulties in exactly matching the return of the underlying index. Therefore the magnitude of tracking error is likely to be of concern to investors. This essay documents the existence of significant tracking error for Australian index funds, where the magnitude of the difference between index fund returns and index returns averages between 7.4 and 22.3 basis points per month for funds operating at least five years. However, there is little evidence of bias in tracking error, implying that these funds neither systematically outperform or underperform their benchmark on a before cost basis. Further analysis documents that the magnitude of tracking error is related to fund cash flows, market volatility, transaction costs and index replication strategies used by passive investment managers. The third essay presents evidence of the performance of U.S. mutual funds, where attention is given to both active and index mutual funds for which the applicable benchmark index is the S&P 500. This essay examines both the magnitude and variation of tracking error over time for S&P 500 index mutual funds. The essay documents seasonality in S&P 500 index mutual fund tracking error, where tracking error is significantly higher in the months of January and May, together with a seasonal trough in the quarters ending March-June-September-December. Statistical evidence indicates tracking error is both positively and significantly correlated with the dividend payments arising from constituent S&P 500 securities. In terms of a performance comparison between actively managed and index funds, active funds on average are found to significantly underperform passive benchmarks. On the other hand, S&P 500 index mutual funds earned higher risk-adjusted excess returns after expenses than large capitalisation-oriented active mutual funds in the period examined. These results suggest the S&P 500 is consistent with capital market efficiency, implying an absence of economic benefit accruing to the average investor utilising actively managed U.S. equity mutual funds. The fourth essay presented in the dissertation examines the performance of Australian investment management organisations with direct reference to their specific characteristics and strategies employed. Using a unique information source, performance is evaluated for actively managed institutional balanced funds (or diversified asset class funds), Australian share funds and Australian bond funds. Performance is evaluated with respect to the investment strategy adopted, the experience and qualifications held by investment professionals, and the tenure of the key investment professionals. This essay also evaluates the performance of senior sector heads to determine the skills of individuals driving the investment process, even though these individuals may migrate to competitor organisations. The essay finds evidence that a significant number of active Australian equity managers earned superior risk-adjusted returns in the period, however active managers perform in line with market indices for balanced funds and Australian bond funds. A number of manager characteristics are also found to predict risk-adjusted excess returns, systematic risk and investment expenses. Of particular note, performance of balanced funds is negatively related to the institution's age and the loyalty of non-senior investment staff. Performance is also found to be significantly higher for managers that predominantly operate their portfolios using a bottom-up, stock selection approach. Interestingly, the human capital of managers, measured as the years of tertiary education undertaken, does not explain risk-adjusted excess returns. Systematic risk is positively related to an institutions age and negatively related to both senior manager loyalty and the implementation of bottom-up portfolio management strategies. In terms of management expenses, fees are directly related to the Australian equities benchmark allocation, the years of tertiary education, the number of years service (loyalty) for non-senior investment professionals and the total years experience of senior money managers. This concluding essay also documents that changes in top management have significant performance effects. In the 12-month period after a change in fixed income director or chief investment officer, performance is significantly lower and significantly higher, respectively. There is no significant difference in performance where changes in top management occur for Australian equities. The years of service (loyalty) provided to asset management firms by equities directors is inversely related to risk-adjusted return. The fifth and final essay examines the investment performance of active Australian bond funds and the impact of investor fund flows on portfolio returns. This essay represents a significant and original analysis in terms of its contribution to the literature, given the absence of Australian bond fund performance analytics and also the limited attention provided in the U.S. Both security selection and market timing performance is evaluated using both unconditional models and conditional performance evaluation techniques, which account for public information and the time-variation in risk. Overall, the results of this essay are consistent with the U.S. and international mutual fund evidence, where performance is found to be consistent with an efficient market. While actively managed institutional funds perform broadly in line with the index before expenses, the paper documents significant underperformance for actively managed retail bond funds after fees. The study also documents that retail fund flows negatively impact on market timing coefficients when flow is not accounted for in unconditional models

The optimal use of return predictability : an empirical study

In this paper we study the economic value and statistical significance of asset return predictability, based on a wide range of commonly used predictive variables. We assess the performance of dynamic, unconditionally efficient strategies, first studied by Hansen and Richard (1987) and Ferson and Siegel (2001), using a test that has both an intuitive economic interpretation and known statistical properties. We find that using the lagged term spread, credit spread, and inflation significantly improves the risk-return trade-off. Our strategies consistently outperform efficient buy-and-hold strategies, both in and out of sample, and they also incur lower transactions costs than traditional conditionally efficient strategies

Wavelet multiscale analysis for hedge funds: scaling and strategies

The wide acceptance of Hedge Funds by Institutional Investors and Pension Funds has led to an explosive growth in assets under management. These investors are drawn to Hedge Funds due to the seemingly low correlation with traditional investments and the attractive returns. The correlations and market risk (the Beta in the Capital Asset Pricing Model) of Hedge Funds are generally calculated using monthly returns data, which may produce misleading results as Hedge Funds often hold illiquid exchange-traded securities or difficult to price over-the- counter securities. In this paper, the Maximum Overlap Discrete Wavelet Transform (MODWT) is applied to measure the scaling properties of Hedge Fund correlation and market risk with respect to the S&P 500. It is found that the level of correlation and market risk varies greatly according to the strategy studied and the time scale examined. Finally, the effects of scaling properties on the risk profile of a portfolio made up of Hedge Funds is studied using correlation matrices calculated over different time horizons

Association Between Clinical Pathways Leading to Medical Management and Prognosis in Patients With NSTEACS.

: A large proportion of patients with non-ST-segment elevation acute coronary syndrome (NSTEACS) are initially selected for medical management (MM) and do not undergo coronary revascularization during or immediately after the index event. The aim of this study was to explore the clinical pathways leading to MM in NSTEACS patients and their influence on prognosis. : Patient characteristics, pathways leading to MM, and 2-year outcomes were recorded in a prospective cohort of 5591 NSTEACS patients enrolled in 555 hospitals in 20 countries across Europe and Latin America. Cox models were used to assess the impact of hospital management on postdischarge mortality. : Medical management was the selected strategy in 2306 (41.2%) patients, of whom 669 (29%) had significant coronary artery disease (CAD), 451 (19.6%) had nonsignificant disease, and 1186 (51.4%) did not undergo coronary angiography. Medically managed patients were older and had higher risk features than revascularized patients. Two-year mortality was higher in medically managed patients than in revascularized patients (11.0% vs 4.4%; P &lt; .001), with higher mortality rates in patients who did not undergo angiography (14.6%) and in those with significant CAD (9.3%). Risk-adjusted mortality was highest for patients who did not undergo angiography (HR = 1.81; 95%CI, 1.23-2.65), or were not revascularized in the presence of significant CAD (HR = 1.90; 95%CI, 1.23-2.95) compared with revascularized patients. : Medically managed NSTEACS patients represent a heterogeneous population with distinct risk profiles and outcomes. These differences should be considered when designing future studies in this population.<br/

Momentum crashes in US stocks, recent evidence during the Covid-19 crisis

Abstract. Cross-sectional momentum has been one of the most persistent return anomalies to provide high levels of abnormal returns in most markets and asset classes over long time periods. While scientific literature is still inconclusive on the core cause of the anomaly, a significant amount of research has been published confirming the existence of abnormal returns related to the phenomenon. Momentum also has its downsides, or its moments, as previous researchers have expressed it. The strategy occasionally experiences large streaks of negative returns, which can wipe out a significant part of the value of momentum portfolios within only a few months. These momentum crashes can take decades to recover from for the strategy and are an important consideration for both researchers and investors seeking to profit from the abnormal returns or diversification benefits that the strategy has provided. As momentum crashes have been found to happen during rebounding markets after market crashes, this thesis studies the momentum crash following the recent market downturn caused by the COVID-19 pandemic and takes a modern look at both momentum and momentum crashes in the US stock market by studying three different momentum strategies formed in previous research with data from January 1990 to March 2022. It also introduces a risk-managed momentum strategy that scales the weights of a traditional 1st decile momentum strategy based on the lagged value of the VIX index compared to its ten-year simple rolling average, up to the previous month. The results show that momentum portfolios had large negative returns in the year following the market downturn caused by the COVID-19 crisis at the start of the year 2020. The negative returns for all studied momentum portfolios were caused by the highly positive returns of the shorted portfolio in the strategy during a market recovery period, similar to prior research results on momentum crashes. The Vix-based risk-managed momentum strategy successfully lowered the effects of momentum crashes compared to its base strategy and provided statistically significant abnormal returns and higher Sharpe ratios compared to the three traditional momentum portfolios throughout the studied time period. Successfully using a lagged value of a market-based index to predict the volatility of momentum has both practical implications, as well as possibly interesting implications for future research on momentum. The traditional 1st decile momentum strategy saw significantly larger losses during momentum crashes compared to 3rd decile momentum strategies; however, the 1st decile portfolio still has higher mean returns than 3rd decile momentum portfolios over a long time period. This suggests that managing the downside risk of aggressive momentum strategies has been extremely important during the 21st century to maximize the benefits of the return anomal

Gender, style diversity and their effect on fund performance

© 2015 The Authors. Published by Elsevier B.V. This is an open access article under the CC BY license(http://creativecommons.org/licenses/by/4.0/).This paper examines the performance of 358 European diversified equity mutual funds controlling for gender diversity. Fund performance is evaluated against funds’ designated market indices and representative style portfolios. Consistently with previous studies, proper statistical tests point to the absence of significant differences in performance and risk between female and male managed funds. However, perverse market timing manifests itself mainly in female managed funds and in the left tail of the returns distribution. Interestingly, at fund level there is evidence of significant overperformance that survives even after accounting for funds’ exposure to known risk factors. Employing a quantile regression approach reveals that fund performance is highly dependent on the selection of the specific quantile of the returns distribution; also, style consistency for male and female managers manifests itself across different quantiles. These results have important implications for fund management companies and for retail investors’ asset allocation strategies