In systematic investments we manage your portfolio based on a set of several well-known trading strategies that offer a sound academic and scientific background. Throughout the years we have implemented and applied these strategies ourselves.
The benefits of systematic strategies are well-known as they eliminate the behavioural bias, reduce costs and increase the probability of profit in a longer investment horizon.
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Financial markets are very different today than they were 10 or 20 years ago. As with every industry, technology and innovation (financial as well) had theirits fair share of influence in the financial markets. The speed and availability of information, on a global scale and accessible to everyone, challenged traditional approaches in investing such as stocks and bonds. The financial crisis in 2008 have also shown that the classic “traditional portfolio” can be a source of great risk as correlation in periods of crisis increase substantially.
As a result of the financial crisis, what we call “traditional alpha” has been greatly challenged. A relentless search of new sources of alpha, what is often called “alternative alpha” or “alternative risk premia” started. The promise was that alternative premia will expose other sources of return and ideally uncorrelated sources of risk.
The idea was not new. During the nineties several researchers, mainly not economists, showed that markets are not efficient and that asset returns can be explained by other “factors” such as value, momentum, quality, carry (and more). The idea of factor-based investing was employed back then by few market participants mainly the more sophisticated and the ones that could take advantage of the advancements in computing and hardware. During this period, investing in these factors wouldcan be considered as “alpha” given that they were not widely known to the investment public.
The rise of ETFs since 2000 have allowed greater adoption of other risk factors and this was greatly intensified after the financial crisis. By 2010 a simple form of factor based investing was easily accessible to retail investors and the greater adoption of these factors gave another big advantage toin the ETF industry (low fees, passive investing).
The popularity of ETFs and the accessibility of factor based investing to the wider audience reduced somewhat the returns of these factors, what can be considered as “enhanced” or “alternative beta”.
How can popular factors such as momentum and value still work?
This happens because they bear uncertainty that many investors are not willing to take or be patient enough to withstand this risk. It is simply the same reason why investors will sell low and buy high.
Factor investing is not as exotic as one might thinkg. The advantage of a risk factor approach is lower correlation between alternative risk factors compared to correlation of traditional risky assets.
Historically, a portfolio of alternative risk factors (equally weighted, risk adjusted) outperformed a traditional portfolio of stocks and bonds.[/showhide]