Nov
3
The Break Down of Factor Exposure Equity Trading, from Alexander Good
November 3, 2014 |
Hey guys,
So after watching the old PTJ video a long time ago I used to have a strategy that would allocate to things that had a tendency to go up after large factor moves. The Chair also mentioned strategies like this in The Education of the Speculator.
For example, Priceline would tend to underperform its peers on a t+2 basis so long as the Euro was in free-fall. So the strategy would keep trading Priceline versus its peers based on movements in the Euro. The qualitative thesis sounds great - the street is slow to adjust its expectations relative to the movement of real time macro assets that have material impact on their forward earnings.
Except for one thing.
In 2011, this strategy started falling apart and I stopped using it. From 2012-2014 it has gone into full free-fall. Moves have become coincident, basically, and over-react. So once EUR starts puking Priceline will immediately start gapping versus its peers, lower. On a t+2 basis it will tend to correct this over-response. I tried to improve the strategy to be more clever (like isolate factor exposure by stripping out fixed income from yen exposure, because things that move up with usdjpy tend to also move up with usgg10yr). It didn't matter/ reverse the breakdown.
My guess is that this is due to the increasing prevalence of quant shops who can run sophisticated lagging correlation analysis minute by minute. I've noticed that people on the list ascribe a lot to backtests like this. Do you have any qualitative analysis of your returns these days versus your returns before 2011 that you'd be willing to share? Is it harder to make $ now?
My gut instinct in response to the BOJ is to pile into things with Japan QE factor exposure (such as thing with a high weight in EWJ, or yield assets in Brazil - Japan FDI in Brazil has been in a structural uptrend for quite some time). But supporting the idea that an overreaction has already occurred, some Brazil yield assets moved up as much as 10-12% on Friday after being run up previously (mysteriously haha, obviously someone knew what was about to happen in Japan). But if we're in an existential market where this is already priced in - the trade is to fade it, not pile in. It'd be interesting to hear your thoughts on the subject.
Cheers,
Alex
Comments
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