Equity Style Risk Premia

One of the most striking empirical regularities of equity markets is the presence of momentum. At the same time, momentum strategies pose several challenges to manage risk, because they are typically negatively skewed and can suffer from large draw downs. Recently, academic research has offered some interesting avenues on how to mitigate the risk of momentum strategies. In particular, Asness, Moskowitz and Pedersen (2013) have shown that momentum is negatively correlated with value strategies, and that combining these two strategies in a portfolio typically results in higher and more stable returns. Additionally, another strand of literature has shown that future equity returns are positively correlated with several stock specific variables that reflect the quality of the stock (Asness, Frazzini and Pedersen, 2014). Furthermore, numerous academic studies have demonstrated the existence of short term mean reversion in equities. In particular, Bali, Cakici and Whitelaw (2009) found a negative and significant relation between the maximum daily return over the past month and expected stock returns. The strategy builds exposure to momentum, value, quality and mean reversion factors in order to capture these well-established style risk premia. The portfolio is designed to be market neutral, targeting a long term beta to the equity market of zero.

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