What Should You Expect From Factor Risk Premia?

The rise of factor-based investing over the last two decades has greatly impacted the investing landscape. From “explaining” active strategies to identifying sources of risk and return in financial markets with greater clarity, viewing asset pricing through a factor lens has been nothing short of a revelation for money management. But amid the rush to tap into what is arguably a better way to analyze, design and implement portfolios, how much do we really know about the historical record for the major factor premia? Perhaps less than we think. Slicing and dicing factor returns is a relatively recent innovation and…

Are Your Tail-Risk Estimates Reliable?

Few aspects of risk management come with higher stakes than estimating tail risk.[1] Just as a chain is no stronger than its weakest link, an investment strategy will be judged (at least in part) by the depth of its biggest losses. Unfortunately, tail risk is one of the toughest challenges for investment analysts for a simple reason: the supply of data for studying extreme events, by definition, is scarce.   In some cases, there may be just enough historical data to offer a hint of how returns behave at the outer edges of worst-case scenarios. The deepest 1% losses, for…

Do You Know What Macro Factors Are Driving Your Portfolios?

You may not be actively targeting macro factors in your portfolios, but it’s impossible to sidestep these elephants in the room.  Intended or not, we’re all running macro-factor portfolios to some extent. BlackRock recently analyzed nearly 10,000 portfolios managed by financial advisors using a macroeconomic lens and found “large common patterns and significant exposures to just a few factors.”  The main factor exposure: economic volatility.  “We find that advisor portfolios are dominated by exposure to economic growth,” writes Brian Lawler (a member of BlackRock’s portfolio solutions group) and several colleagues in “Factors and Advisor Portfolios.”  Accordingly, if you’re interested in…

Inverted Yield Curve: The Flaws in a “Infallible” Recession Indicator

As you undoubtedly know by now, the yield on the 10-year treasury fell lower than the yield on the 2-year treasury, albeit briefly, on August 14th.  If you follow the markets closely, you may have seen it coming.  After all, the spread between the 3-month and the 10-year treasury has been inverted since May of this year.  What many did not see coming was the resulting anxiety, surprise and massive sell-off that followed. A yield curve is simply a graphical depiction of the yields (or interest rates) for bonds having equal credit quality but different times to maturity.  Normally, the…

The content found on this website is for informational purposes only and do not necessarily reflect the opinions or views of The Milwaukee Company or its employees. Nothing presented on this website should be regarded as investment advice or as a solicitation for the purchase or sale of any security or investment or the provision of investment advice.  Visitors to this site should conduct their own independent research before acting on any information found on this site.