Felix Goltz

Scientific Beta & EDHEC Business School

We propose firm-level measures of exposures to macroeconomic risks that substantially improve out-of-sample robustness compared to standard estimation approaches. Systematic equity strategies constructed from such measures offer more consistent macro exposures out of sample than strategies that allocate across sectors or equity-style factors. We do...

The authors construct ESG strategies that have been shown to outperform in popular articles. They assess performance benefits to investors when accounting for sector and factor exposures. They find that most of the outperformance of these strategies can be explained by their exposure to equity style factors that are mechanically constructed from ba...

Many index providers claim that the book-to-price ratio is no longer a sufficient descriptor of the value factor. They argue that it has become outdated because reported book value ignores investments into intangible assets. As a solution, they propose including other valuation ratios, such as earnings-to-price, sales-to-price, cash flow-to-price,...

The finance literature has established a size effect: stocks with small market capitalization outperform larger stocks over the long term. The size factor is included in asset-pricing models because of its explanatory power for crosssectional differences in equity returns. However, recent studies recommend removing size from the factor menu, given...

There is a consensus that equity factors are cyclical and depend on macroeconomic conditions. To build well-diversified portfolios of factors, one needs to account for the fact that different factors may have similar dependencies on macroeconomic conditions. The authors provide a protocol for selecting relevant macroeconomic state variables that re...

Monkey portfolio proponents argue that all smart beta strategies generate positive value and small-cap exposure, which fully explains their outperformance. They also claim that similar results are obtained by any random portfolio strategy, including the inverse of such strategies. We analyze these claims using test portfolios that follow commonly e...

The authors compare two approaches to singlefactor index design: concentrated and diversified indices. From a conceptual perspective, the authors emphasize several issues with highly concentrated portfolios. Concentration in a few stocks reflects high confidence in the precision of the link between expected returns and factor exposure, whereas expe...

This chapter reviews efficient index design methods for factor indices referred to as smart factor investing. It then uses such smart factor indices as building blocks to design suitable allocation strategies to address specific risk/return objectives.

There has been significant evidence that systematic equity investment strategies (so-called smart beta strategies) outperform the cap-weighted benchmarks in the long run. These strategies are usually marketed on the basis of outperformance. However, it is important to recognize that performance analysis is typically conducted on backtests that appl...

This article argues that current smart-beta investment approaches provide only a partial answer to the main shortcomings of capitalization-weighted indices and develops a new approach to equity investing, which the authors refer to as smart-factor investing. The authors then provide an assessment of the benefits of simultaneously addressing the two...

Alternative equity indexes are likely to outperform traditional cap-weighted indexes over the long term, research results show that such smart beta strategies are exposed to several types of risk, including systematic risk (e.g., factor tilts), specific risk (related to the assumptions and inputs of a strategy), and relative risk (i.e., the risk of...

This article clarifies that methodological choices can be made independently for two steps in the construction of alternative equity index strategies: the constituent selection and choice of a diversification-based weighting scheme. By flexibly combining the different possible choices for these steps, the authors create a large variety of strategie...

A number of quantitative or fundamental weighting schemes have been shown to produce robust outperformance with respect to standard cap-weighted equity indices over long time periods. Over periods ranging from a few months to a few years, however, such alternative weighting schemes can generate substantial downside risk relative to cap-weighted ind...

Book synopsis: This unique and detailed Handbook provides a comprehensive source of analysis and research on alternative investment funds in the EU, the US and other leading jurisdictions. Expert contributors offer an unparalleled perspective on the contemporary alternative funds industry, the main areas of regulatory policy concern surrounding it...

Asset Allocation and Portfolio Construction Decisions in the Optimal Design of the Performance-Seeking PortfolioAsset Allocation and Portfolio Construction Decisions in the Optimal Design of the Liability-Hedging PortfolioDynamic Allocation Decisions to the Performance-Seeking and Liability-Hedging PortfoliosKey PointsAppendixQuestions

Indexers often evoke financial theory to claim that cap-weighted stock market indices are good investment choices. This article analyzes the existing literature to see whether the recommendation of holding cap-weighted indices is indeed grounded in financial theory. Although the capital asset pricing model (CAPM) theory does lead to a recommendatio...

Responses to a survey of investment management practitioners in Europe show that most practitioners are aware of key academic concepts in portfolio construction. But they still resort to ad hoc heuristics when they construct portfolios. Consideration of risk-return matters is less common in performance evaluation than in portfolio construction. An...

Investment in exchange-traded funds (ETFs) has been remarkably robust in the course of the recent financial crisis. This paper analyzes investors' perceptions of ETFs and other indexing products by comparing the answers to two surveys of ETF users carried out in 2008 and 2009, before and after the height of the financial crisis. We find that the cr...

Asset managers generally focus on diversification or returns prediction to create added value in portfolios of exchange-traded funds (ETFs). This article draws on dynamic risk-budgeting techniques to emphasize the importance of risk management when decisions to allocate to ETFs are made. Absolute return funds, in which the low-risk profiles of gove...

Unlike mutual funds, hedge funds are reluctant to provide detailed information on their investment portfolios. Since hedge funds may use niche investment strategies in narrow market segments, fund managers portend that thorough disclosure of their portfolio holdings—which are important to assessing future returns—would crowd out their trades, thus...

This paper introduces a novel method for the construction of equity indices that, unlike their cap-weighted counterparts, offer an efficient risk/return trade-off. The index construction method goes back to the roots of modern portfolio theory and focuses on the tangency portfolio, the portfolio that weights index constituents so as to obtain the h...

The authors analyze private bankers’ views on the raison d’être of their profession, their clients’ main financial risks, and the professionals’ opinions on introducing asset liability management (ALM) to private banking. Although practitioners agree on the importance of tailored solutions for their clients’ primary risks such as unexpected inflati...

Recent studies find that a long position in at-the-money straddles consistently yields losses. This is interpreted as evidence for the non-redundancy of options and as a risk premium for volatility risk. This article analyzes this risk premium in more detail by 1) assessing the return properties of straddle strategies and 2) analyzing their role in...

This article describes the role of exchange-traded funds (ETFs) in the implementation of exposure to various asset classes, as shown by a recent survey of European professional investors and asset managers. It provides insights into the current use of liquid index trackers and into the prospects, as revealed by survey responses, for growth in the u...

This paper analyses a set of characteristics-based indices that, it has been argued, outperform market cap-weighted indices. We analyse the performance of an exhaustive list of these indices and show that i) the outperformance over value-weighted indices may be negative over long time periods, and ii) there is no significant outperformance over equ...

Asset allocation is an essential part of portfolio construction, which allows investors to define the portfolio risk level, and as such determines the portfolio future performance. Asset allocation is to be declined in strategic asset allocation and tactical asset allocation. Strategic asset allocation allows investors to choose their portfolio's l...

Performance analysis, which is the final stage in the portfolio management process, is a major concern for both investors and portfolio managers. It provides an overall evaluation of the success of the investment process in reaching its objective. In so doing, it allows managers to evolve toward better control of the investment process and provides...

The focus of this paper is to determine what fraction a myopic risk-averse investor should allocate to investment strategies with convex exposure to stock market returns in a general economy with stochastically time-varying interest rates and equity risk premium. Our conclusion is that typical investors should optimally allocate a sizable fraction...

Hedge fund indices have witnessed steady growth in recent years, reflecting the underlying growth of the hedge funds industry and the increasing variety of product offerings. The interest in indices is mainly driven by institutional investors, who have a strong preference for low fee, transparent and risk controlled investments. The universe of ind...

"Following a growing concern among investors about the quality of hedge fund index return data, this paper addresses the question of whether designing hedge fund indices that fulfil the usual requirements (in particular representative and investable) is or not a feasible task, given a variety of features that are specific to that industry. To test...

Abstract This paper analyses the value of volatility predictions for the asset allocation decision with one risky asset. When isolating the eect,of volatility prediction from the eect of time varying returns, I nd evidence that volatility predictions based on implied volatility achieve 44% to 70% of the performance of a perfect forecast and outperf...

In this paper, we examine how standard exchange traded fixed income derivatives (futures and options on futures contracts) can be included in a sound risk and asset management process so as to improve risk and return performance characteristics of managed portfolios. Our results show that the non-linear character of the returns on protective option...