Quantitative Investment Strategies

Cross-section: Cut-off @ #3

Good day: All winners (long) have positive performance but so have two losers (short) Bad day: All losers (short) have negative performance but so has one winner (long)

Time-series: Cut-off @ 1.5%

Good day: Six winners (long) selected but no losers (short), portfolio of six
Bad day: Three losers (short) selected but no winners (long), portfolio of three

Take-away:

 In heavily tilted markets, time-series momentum strategies are biased with regard to the overall market trend.

 Depending on the cut-off, their selection may vary largely in size while for cross- section strategies the portfolio size is always constant.

*: prices as a function of “time to maturity”

In finance, or economics: A measure used to quantify the worth of something

e.g. intrinsic value, book value, actual cash value or market value

Value is a risk premium since it can be explained / justified as a compensation for a specific risk:

• Value stocks have leveraged exposure to the overall economy: multiple-expansion will slow down in a recession
• As a mean-reverting strategy, it is positively correlated to “bad times”, hence being able to command a premium for the additional risk

– Something that will make other people realize the stock’s value

Evaluation the people:

• Challenge is to understand the people you deal with respect to

Looking for content

• you have to evaluate the substance in terms of

• an absolute and a relative element in this.

Looking for context

• Contrary to popular belief, investments have also their fashioncycles. If something is considered to be “hot” a lot of supply willbe generated. Thus, it will be a challenge to discernate “the good, the bad from the ugly”.

• It will be also a challenge to select the relevant peers and to stay up-to-date regarding their performance.

• Selection should also be judged in the context of other existing or planned investments of your company which leads straight to the overall asset allocation strategy and portfolio construction.

Analysing the (legal) Documents

• Priority 1: checking the legal documents to properly understand the set-up

  ➢HF: check the offering memorandum, the subscription documents etc.

  ➢PE: Analyze the articles of association, shareholder agreements etc.

  ➢Engage external lawyers for a thorough legal document check if necessary

• Priority 2: check all other documents
  ➢Incentive schemes
  ➢Any pending litigations?