FYI: Factor investing is one of the hottest areas in modern finance. It has spawned hundreds of academic articles within the ivory tower and trillions of dollars in AUM without, much of it invested through long-only ‘Smart Beta’ strategies. At its core is a high-stakes unresolved tension spanning the industry and academia: is the stock market essentially efficient, or are there major inefficiencies from which large groups of investors can systematically profit?
The story begins with Nobel Laureate Eugene Fama and his 1965 PhD thesis, in which he proposed that the stock market is efficient and therefore very hard to beat.2 Decades later, Fama and his colleague Kenneth French noticed that stocks of companies that were either relatively small or cheaply valued had higher returns than predicted by the most popular stock market model of the day, the Capital Asset Pricing Model (CAPM). This didn’t dissuade Fama from his belief that markets were efficient; rather, he and French concluded that the CAPM wasn’t the right model. They proposed that there were two more risk factors that were needed in addition to market Beta,3 which they termed the Size and Value Factors. But two of Fama’s PhD students, David Booth and Cliff Asness, took the same data and reached the opposite conclusion: that Factor returns represented a market inefficiency and thus also an investment opportunity. Each went on to become a billionaire building businesses premised on their view that investors would flock to a new Factor-focused style of investing.4
Regards,
Ted
https://elmfunds.com/smart-beta-good-bad-muddy/?utm_source=Daily+AR&utm_campaign=a432c5e88e-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_c08a59015d-a432c5e88e-144127017
