November 2019 Digest

1. Global Growth-Trend Timing (Link)

The Big Question
Can economic signals be used to inform when we apply trend following?

The Most Important Chart
An ensemble of economic signals can potentially help diversify the risk of applying trend-following techniques.

The Key Take-Away
An ensemble of country-level economic indicators appear to improve naive trend following for large economies, but for countries that may be affected by external circumstances, internal economic metrics may not work as well.

2. The Limit of Factor Timing (Link)

The Big Question
How accurate does factor timing have to be to overcome the hurdle rate of a well-diversified, multi-factor portfolio?

The Most Important Chart
For average under-performance, the naively diversified portfolio does very well in the context of hypothetical factor timing models. The low correlation between the factors leads to opportunities for the blended portfolio to limit the downside of individual factors.

The Key Take-Away
For investors looking to generate some modest benefits relative to market-cap equity, there is good news. Any signal for timing factors does not have to be highly accurate to perform well, and in the absence of a signal for timing, a diversified portfolio of the factors can lead to successful results by the metrics of average underperformance and frequency of underperformance.

For those investors looking for higher out-performance, concentration risk will be necessary.

3. The Dumb (Timing) Luck of Smart Beta (Link)

The Big Question
How does the choice of when to rebalance impact different systematic style equity portfolios?

The Most Important Chart
For portfolios rebalanced on a semi-annual schedule, higher concentration, higher turnover, and fewer constraints lead to significant rebalance timing luck impact risk.

The Key Take-Away
Rebalance timing luck is potentially so large for most style / smart beta portfolios that it calls into question the very efficacy of comparing realized performance.

4. Diversification: More Than “What” (Link)

The Big Question
A presentation exploring a holistic view of diversification that not only covers what we invest in (correlation-based diversification), but also how (pay-off based) and when (opportunity-based).

The Most Important Chart
Different risk management approaches work in different environments.  Consistency may be best achieved by diversifying our diversifiers.

The Key Take-Away
A strategically allocated multi-asset portfolio expresses a very specific pay-off structure and often has significant sensitivity to when it is rebalanced.  Introducing trend-following can help introduce important diversification benefits along the how and when axes.

Corey Hoffstein

Corey is co-founder and Chief Investment Officer of Newfound Research, a quantitative asset manager offering a suite of separately managed accounts and mutual funds. At Newfound, Corey is responsible for portfolio management, investment research, strategy development, and communication of the firm's views to clients. Prior to offering asset management services, Newfound licensed research from the quantitative investment models developed by Corey. At peak, this research helped steer the tactical allocation decisions for upwards of $10bn. Corey holds a Master of Science in Computational Finance from Carnegie Mellon University and a Bachelor of Science in Computer Science, cum laude, from Cornell University. You can connect with Corey on LinkedIn or Twitter.