Some thoughts on the @VZakamulin paper shared by @alphaarchitect:

The paper proposes mapping (analytically) an optimal trend strategy to a regime switching process with a duration term that captures mean-reversion over longer horizons.

ssrn.com/abstract=42175…

1/N As @choffstein said, this page from the paper is great value, as it illustrates how different trend strategies simply reflect unique weighting schemes on lagged returns, and express different views on the auto-covariance term-structure.

My take FWIW is that the Fed will engineer one of two paths, and both are bearish for asset prices.

Path 1->They walk the talk on aggressively managing inflation *expectations* lower by executing a painful tightening cycle that shows they will prioritize price stability over asset prices. This is what the market MUST believe if inflation expectations are to revert to manageable levels. Why? Because high commodity prices are here to stay, and could get MUCH worse come late summer. It doesn’t matter if CPI inflation moderates if citizens continue

Running high-Sharpe ensemble strategies is FRUSTRATING.

A short 🧵

1/ Recall that an ensemble is many strategies in one. Ideally these strategies are uncorrelated. The combo is well diversified with a high expected Sharpe ratio. Sounds nice, right?

Here's the rub: By definition, one of the strategies in the ensemble is always doing better than the others. Which means the ensemble always lags the current leading strategy.

Of course, everyone chases into the funds that run concentrated versions of the current love-child.

I’m obviously appalled at the needless human tragedy that will unfold over the next few weeks and months.

What may not be well understood, yet, is that this invasion was precisely timed to unleash an economic attack on the West’s most prized totem: asset prices.

A 🧵about this: Macro conditions before the invasion were characterized by extremely tight inventories of energy commodities, many base metals, and fertilizer & water for grains. Commodities were in aggregate obscenely backwardated as of last week implying urgent demand for immediate delivery.

Such a critical point.

Many sophisticated investors, advisors and small institutions try to model their investment approach on even larger institutions. NO!

Smaller investors have major advantages: mandate flexibility (greater control) & portfolio agility (small mkt impact).

https://twitter.com/rjparkerjr09/status/1455950889123041286

Large institutions are forced to invest in only the most scalable risk premia: public and private equity, term, credit, and RE. Their only real advantage is potential *access* to better deals. At the limit they converge on the mkt portfolio, with limited capacity for active risk.

Awesome @MacroVoices with Russel Napier.

A 🧵to cement my own understanding.

1/ We may get a quick deflationary shock out of China in the near-term as they manage through fallout from an implosion of their property bubble. 2/As the credit contraction worsens the PBOC and Chinese government will materially devalue the Renminbi to give them room to absorb the shock with monetary intervention.

Most bear markets aren't like 2008.
A short 🧵

1/N Cyclical bear markets average a drawdown of about 35% and last 1-3 years.

They're characterized by a ROTATION of investor capital from the leaders of the last cycle into the leaders of the new cycle. This ROTATION causes the indexes to drop precipitously because the leaders of the previous cycle represent a disproportionately large percentage of the index, and the leaders of the new cycle represent a vanishingly small proportion of the index.

NEW PAPER: OPTIMAL COMMODITIES

investresolve.com/whitepaper-opt…

THREAD

1/ A shift from financial based stimulus to fiscal stimulus is stoking inflation fears. Commodities have historically acted as a hedge against inflation in the cost of energy, food, and industrial inputs. 2/ Passive commodity investment represents about $300 billion in assets under management. Most of these assets track popular commodity indices like GSCI, Refinitiv/CRB (CRB), Bloomberg (BCOM), and Deutsche Bank Optimal Yield (DBOY).

I offered some analysis in support of the view that there was a material shift in the character of factor and style premia strategies in 2017.

In fact, the shift started in 2010.

https://twitter.com/GestaltU/status/1341773479578914823

Professor @zhanglu_osu very graciously makes dozens of factor strategy return series available for download on his website, global-q.org/testingportfol….

The portfolios are formed using standardized datasets, decile sorts, cap weighted, daily returns.

@alphaarchitect asked what happened to style Premia in 2017.

Let's start with the fact that something happened.

Like...something very material. These are CUMULATIVE ALPHAS (compounded residuals from regressions of fund returns on IVV ETF returns setting intercept to 0) From Jan 2018 through end of October. I scaled all lines to have the same volatility (10% annualized) for easy comparison.

NEW PAPER:

Maximizing the Rebalancing Premium:
Why Risk Parity portfolios are much greater than the sum of their parts.

investresolve.com/maximizing-the…

This paper is an appendix to the paper, Risk Parity: Methods and Measures of Success

investresolve.com/risk-parity-me…

THREAD: 1/ In the current low return environment, a diversified risk parity portfolio with a 2-3 percent rebalancing premium may be an attractive alternative to global 60/40, with the added benefit of owning a diverse set of markets that benefit from a wider range of economic outcomes.

New paper:

Risk Parity: Methods and Measures of Success

investresolve.com/risk-parity-me…

Thanks to the following and others for feedback and edits:

@choffstein
@investingidiocy
@profplum99
@larryswedroe
@maratikus_quant
@Steven_Downey86

An introductory thread: 1. Risk Parity (RP) portfolios are designed to achieve reliable investment performance given any trajectory of future growth and inflation shocks. This is in contrast to typical “balanced” stock & bond portfolios like 60/40 which only thrive in periods of disinflationary growth.

After the 2008/9 bailouts I almost abandoned the investment business because I have a toxic aversion to moral hazard. My brain broke when the banks were bailed out. I sought counselling for a few months and eventually found writing as a way to express frustration and find catharsis. That’s when the GestaltU blog was born (now @InvestReSolve blog).

Thread

I'm sympathetic to the arbitrage argument against #trend-following but there are several compelling counter-arguments:

1. #CTA assets are still a vanishingly small proportion of total global market cap. Ex-Bridgewater they're prob less than $200B vs $100T global market.

https://twitter.com/JohnHawver/status/1215621550742917120

2. While prices are set at the margin, CTA trading (esp. ex-BW) still represents a single-digit proportion of total trading.

1/ An Executive Summary (in Tweet form) of our new paper

Dual Momentum – A Craftsman’s Perspective

Download here:
investresolve.com/global-equity-…

Everything that follows in this thread is based on HYPOTHETICAL AND SIMULATED RESULTS. 2/ Our objectives were twofold:

1.Verify the strength and robustness of the Dual Momentum concept and specifically the Global Equity Momentum strategy

2.Describe how to use ensemble methods to preserve expected performance while minimizing the probability of adverse outcomes

TWEETSTORM on 200 Years of Global Premiums

1/ @Paradoxinvestor and his team at @Robeco spent months constructing a deep historical dataset stretching back to 1800 consisting of stock indexes, 1-year government bonds, commodities and currencies.

Summary:
investresolve.com/blog/over-two-… 2/ They used this novel dataset to conduct long-term out-of-sample analyses on some of the most pervasive, persistent, economically significant and investable style premia: trend, momentum, value, carry, seasonality, and Betting-against-Beta (BAB).

Interesting to see some investors publicly reacting to the "mathiness" of investment products and specifically dismissing the opportunity for better performance through more optimal methods of portfolio construction.

So far optimized portfolios are punching above their weight. Comparing the performance of Min Vol products vs lowest cost cap-weighted products we see that Min Vol ETFs have dominated lower cost cap-weighted ETFs in compound returns, risk-adjusted returns, drawdowns, and alpha to respective benchmarks since inception in late 2011.

Absurdly long tweet storm coming your way.

Goal is to connect the dots on the concepts in our Optimization Machine series and show why its relevant.

Currently at 38 tweets and 6 figs/tables. Will bleed it out so it's not so overwhelming.

#Optimization #RiskParity #investing 1/We’re 3 articles into a series on portfolio optimization and I’ve been challenged to distill the core themes and make it relevant for practitioners.

Here’s the TL;DR:

Portfolio construction may substantially boost performance without active views on relative returns.

Referring to our earlier tweetstorm:

https://twitter.com/GestaltU/status/1026440264913707008

@choffstein asked a great question about whether multi-strat CTAs may have a diluted capacity to provide the "crisis alpha" that probably motivated their purchase.

I offer a few thoughts on this below (0/9) 1/Prior to 2008 institutions were interested in crisis alpha at an observation frequency measured in quarters, or perhaps months. At this frequency, long-term trend strategies provide strong positive convexity.