investment viewpoints
Crowding, timing and dispersion: a framework for ARP
Head of Research, Multi-Asset
As part of its on-going, quantitative research initiative, Lombard Odier Investment Managers invited Nick Baltas for an interactive session at the firm to meet our quantitative teams from New York, London, Geneva and Hong Kong.
A visiting academic at Imperial College Business School since 2012, Baltas is also head of R&D, Systematic Trading Strategies at Goldman Sachs International. He earned a PhD in Finance from Imperial College Business School and has published extensively in academic journals1.
Baltas presented to the LOIM teams his research on the impact of crowding, timing, and performance dispersion in alternative risk premia (ARP) investing. Understanding these stylized facts is key for strategy design, portfolio construction and performance assessment, in his view.
The presentation started with a brief empirical analysis of ARP performance in 2019 and the dispersion of outcomes witnessed in the ARP industry. This dispersion naturally raises questions about crowding and factor timing2.
The discussion then addressed the impact of crowding in systematic investing, as well as presenting a framework for investors to consider the timing of individual asset or strategy decisions, and how to tilt portfolios accordingly.
Baltas argues that crowding is a major concern for investors in the ARP space.
Baltas’s research, published in the Financial Analysts Journal, argues that crowding is a major concern for investors in the ARP space. By focusing on the distinct mechanics of various systematic strategies, he contributes a framework that provides insights on the implications of crowding on strategy performance. Understanding such implications is key for strategy design, portfolio construction, and performance assessment.
His analysis shows that divergence premia, like momentum, are more likely to underperform following crowded periods. Conversely, convergence premia, like value, show signs of outperformance as they transition into phases of larger investor flows.
We believe such research aids investment managers to improve all aspects of the investment process, from strategy design and portfolio construction, through to assessing returns.
sources.
1 For an overview of papers, please see: https://www.researchgate.net/profile/Nick_Baltas
2 Crowding refers to the size/trades of a specific industry vs the overall market size/trades and is inherently connected to market impact. Factor timing refers to getting in and out of position based on factor models such as Fama & French (1988).
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Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.
This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, 1150 Luxembourg, authorised and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended; and within the meaning of the EU Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD). The purpose of the Management Company is the creation, promotion, administration, management and the marketing of Luxembourg and foreign UCITS, alternative investment funds ("AIFs") and other regulated funds, collective investment vehicles or other investment vehicles, as well as the offering of portfolio management and investment advisory services.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipient exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. This material contains the opinions of LOIM, as at the date of issue.
Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent. ©2020 Lombard Odier IM. All rights reserved.
