R24: Active Equity Investing - Strategies Flashcards
Issues with constructing factor-based portfolio
- Middle quantile ignored
- Concentrated
- Shorting may not be possible
- Residual risks if not pure factor portfolio
Value-based strategies?
- RV
- Contrarian
- Income
- Deep value
- Special situations
- HQ value
Name the style factors
- Value
- Price momentum (extreme tail risk reduced by removing sector exposure - neutralised price momentum)
- Growth
- Quality
- Unconventional (e.g. online mentions)
Characteristics of ideal company targeted by activists
- Lower sales/earnings vs average
- Negative price momentum
- Weak governance
Other active management strategies other than activist
- Statistical arbitrage
- Market microstructure
- Event-driven
What is the fundamental investment process?
- Define investment universe - pre-screen
- Analysis and forecast
- Build portfolio, measure performance and rebalance
Pitfalls of fundamental investing?
- Behavioural bias (confirmation, availability, illusion of control, regret aversion, loss aversion, overconfidence)
- Value trap
- Growth trap
What is the quant investment process?
- Define market opportunity (no filter)
- Acquire and process data (convention and un)
- Back-test (identify specific factors and calculate IC)
- Create multi-factor model (mean variance optimisation)
- Evaluate strategy (out-of-sample back-test, metrics)
- Construct portfolio (risk models and TCs)
Pitfalls of quant?
- Data (survivorship bias, look-ahead bias, data mining/over-fitting)
- Market constraints (TCs, turnover constraints, short availability)
Holdings based pros and cons
Pros:
Current holdings, can pick up change in style quickly, not reliant on historical portfolio
Cons:
Extensive info needed, judgemental determination of characteristics, doesn’t reflect actual stock selection techniques
Returns based pros and cons
Pros:
Clear theoretical basis, easy, limited data needed, comparison, replicate
Cons:
Historic results, indices used need to be specified correctly, no holdings considered (so may indicate mandate breach incorrectly)
What is overfitting?
Statistical model that contains more parameters than can be justified by the data
What does membership style include?
Investments separated by country/industry/market
What is a staggered board?
Only a minority of directors are elected each year
What are multi-class structures?
They give founding members more than one vote per share
