External Research – Risk Premia

Antoine Falck, Adam Rej, David Thesmar: In this paper, we propose ex-ante characteristics that predict the drop in risk-adjusted performance out-of-sample for a large set of stock anomalies published in finance and accounting academic journals. Our set of predictors is generated by hypotheses of OOS decay put forward by McLean and Pontiff (2016): arbitrage capital flowing into newly published strategies and in-sample overfitting linked to multiple hypothesis testing. The year of publication alone – compatible with both hypotheses – explains 30% of the variance of Sharpe decay across factors: Every year, the Sharpe decay of newly-published factors increases by 5ppt. The other important variables are directly related to overfitting: the number of operations required to calculate the signal and two measures of sensitivity of in-sample Sharpe to outliers together add another 15% of explanatory power. Some arbitrage-related variables are statistically significant, but their predictive power is marginal. Download the paper here: https://arxiv.org/abs/2105.01380

Alternative risk premia (ARP) are designed to provide low-cost exposures to long–short risk premia often embedded in hedge fund returns. This article describes the performance of the ARP market in the form of bank-provided total return swaps, which are investable strategies that provide after-cost access to ARP. Over the 2010–20 period, many of these risk premia provided significantly positive returns. In addition, these ARP explain a high fraction of returns on hedge fund indexes, especially for quantitative strategies, along with traditional market factors. Finally, we find that ARP and market factors largely eat away hedge fund index returns. https://www.tandfonline.com/doi/full/10.1080/0015198X.2021.1960133