In this article, the authors explore six quantitative environmental (E), social (S), and governance (G) strategies to provide insights into best practices for ESG portfolio construction. These strategies offer different approaches to the trade-off between desired ESG attributes and investment performance. They conclude that fully understanding the dynamics of these trade-offs will allow investors to select the strategy that best matches their ethical and financial views.
Addressing Diversity, Equity, and Inclusion in Public Equity Portfolios
by Mark BatemanUntil January 20, 2021, Condoleezza Rice will have been the highest-ranking African American woman to serve in the executive branch of the US government, having served as secretary of state from 2005 to 2009. With Kamala Harris’ assumption of the vice presidency...
Publishing Our Diversity Data to Promote Transparency
by Mark Bateman & Nancy MalikAs many of you likely have seen on our website, Aperio is Latin for “to make clear, to reveal the truth.” We looked in Google translate and found a definition we like even better: “disclose to view.” Aperio has always been a proponent of transparency...
Nine years into a bull market and with volatility at a historical low, now is a good time to ensure you’re on top of the risks in your hedge funds and active equity. In Sleeping Dragons, we take a second look at a hedge fund index and contemplate what might happen when market turbulence returns.
The risk-loving quest for outperformance can give hedge funds an anti-quality profile: one with too much volatility and leverage and too little profitability relative to a diversified benchmark. Left unchecked, these exposures can drive performance, and in our empirical study " Are Hedge Funds Anti-Quality?," we found that they did. Our study focused on a hedge fund index exchange-traded fund (ETF), the Global X Guru™ Index ETF (GURU). From its website, GURU "seeks to generate alpha over the broad market by investing in highest conviction ideas from a pool of hedge funds." GURU’s holdings are based on these hedge funds’ long-only equity positions in US companies, which are obtained from their Securities and Exchange Commission Form 13F filings.
GURU exhibited a disturbingly consistent anti-quality profile relative to the Russell 3000 Index over the nearly four-and-a-half-year period beginning in July 2012 and ending in October 2016. The anti-quality profile contributed materially to GURU’s outperformance of the Russell 3000 during an initial period of almost three years, and to its underperformance in the subsequent year and a half during which GURU crashed twice.
Since the completion of our study in October 2016, the US equity market has grown by more than 15% and volatility has hardly been noticeable. Historically, this market climate has been relatively favorable for hedge funds, and GURU outperformed the market by 31 basis points from November 2016 through June 2017 as shown in Figure 1.
Figure 1: Cumulative active returns to GURU (net asset value) over the Russell 3000 Index, November 2016–June 2017. Source: Bloomberg Finance L.P. and the FTSE Russell website.*
An analysis based on a GURU replication indicates that the anti-quality profile has persisted. Table 1 shows that anti-quality contributed 49 basis points of outperformance between November 2016 and June 2017. The most substantial anti-quality contribution came from the outperformance of high-beta stocks.
Table 1: Quality factor exposures and return contributions to a GURU replication relative to the Russell 3000 index, November 2016–June 2017. Source: Bloomberg Finance L.P. and Barra US Total Market Equity Model (USSLOW).
Equity markets are calm just now, and market disruptions may seem like a distant, unpleasant memory. But turbulence will inevitably return, even if we cannot say when. If quality continues to be a winner in troubled markets, investors in hedge funds with anti-quality profiles may, once again, wonder what they are getting for fees as high as 2 and 20. Investors with complex and opaque holdings might consider factor profiling their investments before the next drawdown, giving themselves the opportunity to put the hedge back in hedge funds.
* www.ftse.com. "FTSE Russell" is a trading name of FTSE International Limited (FTSE) and Frank Russell Company (Russell) and their respective subsidiary undertakings, which are members of the London Stock Exchange Group plc.
The Russell 3000® Index is an equity benchmark for US stock performance. It is a capitalization-weighted index covering the largest 3,000 publicly traded US stocks. The index represents approximately 98% of the total market capitalization of the US stock market.
Aperio’s strategies are not in any way connected to or sponsored, endorsed, sold, or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). All rights in the Russell indexes vest in the relevant LSE Group company. The LSE Group does not accept any liability whatsoever to any person arising out of the use of the strategies or the underlying data.
This article is provided for informational purposes only. The information contained within this article was carefully compiled from sources Aperio believes to be reliable, and it is accurate to the best of our knowledge and belief. However, Aperio cannot guarantee its accuracy, completeness, and validity, and cannot be held liable for any errors or omissions. All information contained herein should be independently verified and confirmed. Aperio does not accept any liability for any loss or damage whatsoever caused in reliance upon such information. Aperio provides this information with the understanding that it is not engaged in rendering legal, accounting, or tax services. In particular, none of the examples should be considered advice tailored to the needs of any specific investor. Aperio recommends that all investors seek out the services of competent professionals in any of the aforementioned areas. With respect to the description of any investment strategies, simulations, or investment recommendations, Aperio cannot provide any assurances that they will perform as expected and as described in this article. Past performance is not indicative of future results. Every investment program has the potential for loss as well as gain. You cannot invest directly in an index.
Aperio is providing this link to a third-party website that displays a research report, article, webcast, video, or other content that we believe may be informational or educational for you. This linked content is presented by a source that we believe to be reliable, but we do not guarantee its accuracy or completeness, including any associated disclosures. Aperio has no control over the nature of the content on, or the availability of, this third-party website.
The inclusion of this link on our website also does not imply a recommendation or endorsement of any views expressed in such linked content and should not be considered: investment, tax, or legal advice; a solicitation; a recommendation of Aperio or any third-party’s services; or an offer to buy or sell any securities or related financial instruments in any jurisdiction.
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Lisa Goldberg, PhD
Director of Research
What are your key responsibilities? Research works with portfolio management and client service to develop investment strategies that align with clients’ financial and personal goals. At the highest level, that involves the humbling task of trying to understanding financial markets and the ideas and technologies that are changing them. Day to day, we build quantitative tools and analyze data from both empirical studies and client portfolios. I spend a lot of time trying to figure out which tools will be most relevant, synthesizing data into useful results, and communicating those results. I write blog posts and articles, assemble educational materials, present at conferences and forums, and meet with clients.
Describe your key previous work experience. I began my professional life as a professor of mathematics, but my career in finance began in 1993 when I joined the research team at Barra. I spent 19 years at that firm building factor-based risk models and portfolio management tools, and supporting clients as they incorporated risk in their investment processes. At Barra, I worked in fixed income, credit, equity, and foreign exchange. I developed methods to aggregate single-asset-class risk models into enterprise-wide portfolio management systems, and I spent several years developing a model to forecast and attribute tail risk. My work generated five patents. In 2004, Barra was acquired by Morgan Stanley and merged with MSCI, giving me exposure to index construction and the opportunity to collaborate with asset and wealth managers, pension funds, investment banks, and hedge funds around the world. The experience of building Barra models has given me a strong foundation to support and extend Aperio’s portfolio construction process and to work with Aperio’s clients.
What is the most interesting aspect of the job to you? Technology and data science are transforming financial markets and facilitating personalized investing. Aperio is at the center of this transformation, and it is great to be part of that change.
Describe some noteworthy projects you have worked on that directly impact Aperio’s clients. Our After-Tax Back-Testing Analysis Tool (ATBAT) is a home-grown system that has revolutionized the way we evaluate strategies and communicate with clients. By measuring strategy performance over tens or even hundreds of historical periods and at multiple horizons, ATBAT provides a broad, detailed picture of the upside potential of a strategy and its risks. ATBAT elevates our ability to match clients with appropriate strategies.
What do you like most about working at Aperio? Aperio emphasizes excellent communication and open discourse, which brings a lot of great thinking to the decisions we make. In a different direction, I am the go-to person for all kinds of math problems, and I love to work on them.
List any committees or organizations you are a member of outside Aperio. I am Co-Director of the Consortium for Data Analytics in Risk (CDAR) and an Adjunct Professor of Economics and Statistics at the University of California, Berkeley. I’m an expert judge for the Moskowitz Prize Committee, an arXiv moderator, and a referee on numerous academic journals. I serve on the Jobs Committee for the American Mathematical Society, and I chair their Porter Public Lecture Committee.
What are some non-work-related things we should know about you? I spend as much time as I can with my husband (a mathematician) and daughters (a materials scientist and an aspiring civil liberties attorney). I founded a book club, and we began with Judea Pearl and Dana Mackenzie’s The Book of Why: The New Science of Cause and Effect. It’s a game changer. I am an avid swimmer, and I am on track to complete a lap around the equator, 40,075 kilometers, in 2042. And I dabble in basketball statistics.
What postsecondary degrees and/or professional certifications do you possess? BA in Mathematics from the University of Rochester; PhD in Mathematics from Brandeis University.
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