Empirical Facts

AgPa #59: Why and When Institutional Investors Fire Asset Managers

Forbearance in Institutional Investment Management: Evidence from Survey Data (2023)
Amit Goyal, Ramon Tol, Sunil Wahal
Financial Analysts Journal 79(2), 7-20, URL

As we all know, extracting excess returns from (equity) markets is not so easy. Identifying and monitoring managers who can reliably do that is therefore at least as difficult, if not harder. In particular, deciding whether to continue working with a temporary underperforming manager is often difficult. This week‘s paper examines how institutional reports approach this problem in practice…

  • Institutional investors are more patient than thought
  • Tolerance for underperformance is surprisingly long
  • Sophistication and risk-appetite of investors do matter

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AgPa #57: Stocks for the Long-Run – Riskier Than Thought

Stocks for the long run? Evidence from a broad sample of developed markets (2022)
Aizhan Anarkulova, Scott Cederburg, Michael S. O’Doherty
Journal of Financial Economics 143(1), URL/SSRN

Stocks for the Long-Run – this is not only the title of Jeremy Siegel’s popular book but also a well-established idea among investors. If you can wait long enough and don’t need your money on the way, just put it in a diversified index fund and wait. This week’s AGNOSTIC Paper challenges this simple advice and shows that even over very long periods, the chance of losing money with stocks can be higher than previously thought…

  • History offers some scary events of wealth-destruction
  • The US equity market is not necessarily representative
  • Global diversification helps tremendously

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AgPa #56: The Equity Risk Premium of Small Businesses

Small Business Equity Returns: Empirical Evidence from the Business Credit Card Securitization Market (2023)
Matthias Fleckenstein, Francis A. Longstaff
The Journal of Finance 78(1), URL

In 2020, there were more than 31M small private businesses in the US. Even though the estimated value of those businesses is “just” $12T, the sheer number is astonishing when compared to about 4,000 tradable US stocks (excluding penny stocks). For stocks, we typically use measures like returns, multiples, and volatilities. But given the lack of daily prices, it is difficult to calculate those measures for small private businesses. This week’s AGNOSTIC Paper is an attempt to change that…

  • Small businesses had an equity risk premium of 10.7% and a volatility of 56%
  • Robustness: the model generates plausible results for S&P 500 stocks

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AgPa #53: Investing in Interesting Times

Investing in Interesting Times (2023)
Annti Ilmanen
The Journal of Portfolio Management Multi-Asset Special Issue 2023, URL/AQR

Almost exactly one year ago, Antti Ilmanen (Partner at AQR Capital Management) released his outstanding book Investing Amid Low Expected Returns: Making the Most When Markets Offer the Least. The book is (in my opinion) a must-read and the timing couldn’t have been better. Many of the key themes began to materialize in 2022. Given how much markets have changed since then, Antti released a few updates for six of his major ideas in this week’s AGNOSTIC Paper.

  • The low expected return challenge
  • Investors’ response to low expected returns – private markets
  • What happened in 2022 and where we stand now
  • Long-only versus long-short strategies
  • Downside protection via trend-following

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AgPa #51: Short Sellers vs. Firms

Go Down Fighting: Short Sellers vs. Firms (2012)
Owen A. Lamont
The Review of Asset Pricing Studies 2(1), URL

I like controversial and (in my opinion) misunderstood topics and this week’s AGNOSTIC Paper examines the next big one: short selling. The paper is unfortunately already more than 10 years old, but it is still a go-to reference for short selling. Apart from that, the fights between firms and short sellers are also quite entertaining – at least from an outsider’s perspective…

  • Short-seller-fighting firms tend to massively underperform
  • The results are robust after controlling for the major factors

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AgPa #44: Betting against Quant – Thematic Indices

Betting against Quant: Examining the Factor Exposures of Thematic Indexes (2021)
David Blitz
The Journal of Beta Investment Strategies Winter 2021, URL/SSRN

This week’s AGNOSTIC Paper examines a recent trend in the asset management industry: thematic indices. The sales pitch is simple. With a thematic index you can easily invest in the “next big things”. Artificial intelligence, aging population, e-sports and gaming, healthcare breakthroughs – just name your buzzword and you will find an investment product for it. This week’s paper is among the first that examine such thematic investments through the lens of the major factor premiums.

  • Thematic indices are more volatile and have higher betas than the overall market
  • Thematic indices tend to hold expensive, low-quality stocks with neutral momentum
  • There are still reasons why thematic indices exist

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AgPa #40: Size Effect – Fact and Fiction

Fact, Fiction, and the Size Effect (2018)
Ron Alquist, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Fall 2018, 45 (1) 34-61, URL/AQR

After examining several Facts and Fictions around factor investing in general, momentum, value, and low-risk, this week’s AGNOSTIC Paper tackles the final anomaly. The size effect received a lot of attention in both academia and the investment industry, probably because it is one of the oldest documented anomalies. In this final paper of their Fact and Fictions series, the authors examine some myths around it.

  • Fiction: Size is the strongest documented factor
  • Fact: The size effect weakened since its discovery
  • Fiction: The size effect is robust across different measures
  • Fact: The size effect is strongly related to the January effect
  • Fiction: Size also works in international equity markets
  • Fact: Size does not work within other asset classes
  • Fact: Most of the size effect are micro cap stocks
  • Fact: Size is difficult to implement in real-world portfolios
  • Fiction: The size effect is more than just a liquidity effect
  • Fiction: There are economic theories for the size effect
  • Fiction: Size works because other factors are stronger among small cap stocks
  • Fact: There are reasons to overweight small caps even without the size effect
  • Fact and Fiction: The size effect is stronger when controlling for other factors
  • Fact: Size receives a lot of attention despite weak evidence

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AgPa #39: Low-Risk Investing – Fact and Fiction

Fact and Fiction about Low-Risk Investing (2020)
Ron Alquist, Andrea Frazzini, Antti Ilmanen, Lasse Heje Pedersen
The Journal of Portfolio Management Multi-Asset Special Issue 2020, 46 (6) 72-92, URL/AQR

After examining value and momentum, this week’s AGNOSTIC Paper examines some Fact and Fictions around defensive / low-risk investing. The defensive / low-risk factor captures various well-known effects like the low-volatility and Betting Against Beta effect, but also fundamental strategies like quality (a.k.a. the Quality Minus Junk factor).

  • Fact: Low-risk securities generate risk-adjusted outperformance
  • Fiction: The low-risk premium is weaker than other factors
  • Fact: Low-risk strategies worked out-of-sample
  • Fiction: Low-risk profits come from industry bets
  • Fact: Low-risk investing worked across geographies and asset classes
  • Fiction: Low-risk investing doesn’t work because the CAPM is dead
  • Fact: There is economic theory behind the low-risk premium
  • Fiction: Low-risk investing does not survive trading costs
  • Fact: Low-risk investing can lose money in bear markets
  • Fiction: Low-risk factors became too expensive

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AgPa #38: Value Investing – Fact and Fiction

Fact, Fiction, and Value Investing (2015)
Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Fall 2015, 42(1) 34-52, URL/AQR

After busting some myths around momentum, this week’s AGNOSTIC Paper is the sequel for value investing. The authors, the same AQR crew as last week, present several Facts and Fictions around value investing which is actually one of the oldest investment styles out there.

  • Fiction: Value investing requires concentrated portfolios
  • Fiction: Value has low turnover and is thus passive
  • Fact: Fundamental indexing is similar to systematic value investing
  • Fact: Profitability signals improve value investing
  • Fiction: Value is redundant in modern factor models
  • Fact: Value also works in other asset classes
  • Fact: Value is best measured by a composite of signals
  • Fact: Value is quite weak among large caps
  • Fiction: The value premium should disappear because there are no plausible explanations

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AgPa #37: Momentum Investing – Fact and Fiction

Fact, Fiction, and Momentum Investing (2014)
Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Special 40th Anniversary Issue 2014, 40(5) 75-92, URL/AQR

After examining the general Facts and Fictions about factor investing, this week’s AGNOSTIC Paper examines momentum in more detail. Specifically, the authors combat 10 misleading myths about momentum…

  • Myth 1: Momentum returns are economically not meaningful
  • Myth 2: Long-only investors cannot capture momentum
  • Myth 3: Momentum is much stronger among small-caps
  • Myth 4: Momentum does not survive trading costs
  • Myth 5: Momentum produces a huge tax bill
  • Myth 6: Momentum is better as a screen than as a factor
  • Myth 7: Momentum returns should disappear in the future
  • Myth 8: Momentum is too volatile to rely on
  • Myth 9: Different momentum measures lead to different results
  • Myth 10: There is no theory behind momentum

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