Client Advisory

Crashes are regular features of markets, and they can have a dramatic impact on long-term total returns. Even so, surprisingly few investors explicitly factor crash risk into the design of their portfolios. In this presentation, we compare prevalent approaches to reducing crash exposure, contrasting their unique benefits, hidden risks, and relative efficiency. We show how crash risk may be concealed in alternatives and private market strategies, and we consider how premium harvesters may underwrite such risk more efficiently and transparently.

The COVID pandemic has generated historic volatility amid enormous uncertainty about the virus’s progression, its economic impact, and the effectiveness of policy countermeasures. For investors who have been trying to assess the market’s response and chart a course of action, there is little systematic research on the investment impacts of geopolitical shocks to guide them. In this discussion, we shed new light on how markets react to “shocks,” based on analysis of a proprietary events dataset that includes epidemics as well as civil unrest, acts of terror, and disasters. We also consider how investors process systemic geopolitical uncertainty and whether cognitive biases make them prone to risk neglect. We discuss implications for portfolio managers and allocators.

While passive investing has garnered enormous media attention, we understand little about how it may be affecting market behavior. Does it reflect a high level of efficiency that prevents active management from adding value? Or might its very success create new forms of opportunity as well as risk? This talk explores common misconceptions around “the rise of passive” and examines novel evidence regarding its potential impact on market efficiency and fragility. We consider implications for both active managers and asset owners.

As factor investing strategies proliferate, investors face a greater challenge than ever in evaluating alternatives. Starting with a case study involving momentum, we demonstrate benefits of sophisticated factor implementations in more precisely capturing drivers of returns premia and in controlling risk. We expose how simple approaches impose often-overlooked restrictions on the investment process, and we examine potential the costs and risks. Along the way, we outline a framework to compare factor investing implementations.