Value, Momentum & Carry Across Asset Classes (from the Archive)
SUMMARY
INTRODUCTION
There?is a 72% probability of the San Franciso Bay Area getting hit by at least one earthquake of a magnitude of 6.7 or stronger between today and 2043 according to the United States Geological Survey, which is a scientific agency of the U.S. government. An earthquake of that magnitude is likely to cause major damage in populated areas, especially if accompanied by a tsunami.
Given high valuations, record levels of debt, and poor demographics investors are likely to get hit by financial earthquakes with almost a 100% probability before 2043. The two core approaches for minimizing financial damage are hedging strategies and portfolio diversification, or a combination of both.
Long-short factor investing strategies are typically structured beta-neutral, which would provide diversification for a classic equity-bond portfolio. Academic research supports that factor returns can be harvested from equities as well as from other asset classes, where they are usually called risk or style premia. Institutional investors have bought more than $500 billion in risk premia products from investment banks, highlighting the interest in uncorrelated strategies that may preserve capital.
In this short research note we will investigate Value, Momentum and Carry factors across asset classes as well?as the benefit of adding an allocation of these to a classic equity-bond portfolio.
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