A couple of years ago, we had written about an interesting new paper on a momentum strategy that avoids crashes.
It sounded too good to be true so we setup a model portfolio to track it. Turns out, it did avoid the crash and put in some decent returns on the board compared to another one of our large-cap momentum strategies - the All Stars.
The model spent most of last year in cash, avoiding a lot of heartburn, while at the same time, testing our patience as it failed to capitalize on (what proved to be short-lived bear-market) rallies. Even now, it is about 70% in cash.
Not sure what the future holds for this odd duck. Stick around and find out!
Markets this Week
More here: country ETFs, fixed income, currencies and commodities.
Links
Research
Great! Another crashless-momentum paper.
Momentum profits collapse and reversal occurs when preceding market volatility is relatively high. Based on these intertemporal patterns, we implement an investment strategy that switches from momentum to reversal when volatility is high.
Index investors often point out that it is futile to predict which active manager is going to outperform in the future and there is a ton of literature that backs them up. However!
In this paper, we introduce a new approach that enables investors to identify the funds that outbid both the benchmark and the peer group. We find that winners suggested by our approach show persistence in performance 36 months ahead.
Academics rediscover the index effect.
Using the reconstitution of MSCI indices in seven Asian markets from 2006 to 2021, we discover arbitrage opportunities arising from index-tracking funds’ efforts to minimize tracking errors around the dates when index reconstitution changes become effective (i.e., effective dates). We document pronounced abnormal returns and trading volume on the last trading day before the effective date. Arbitrageurs can exploit this predictable pattern of stock price changes and earn sizable abnormal returns if they long the added and short the deleted stocks on the announcement date and close their positions at the end of the day before the effective date.
Investing
ChatGPT Told SoftBank’s Masayoshi Son His Ideas Are Great. Now He’s Investing Big in AI. (wsj)
ChatGPT’s answers could be nothing but a hallucination. (cybernews)
Social App IRL, which raised $200 million from VCs including SoftBank, shuts down after the CEO was found lying about the app having 20 million active users while in reality, 95% of those users were “automated or from bots.” (theinformation)
Byju's Crisis: Peak XV Partners' GV Ravishankar, Prosus' Russel Dreisenstock officially step down (livemint). Deloitte resigns as the auditor because the company failed to come out with its financial statements for FY 2022 (telegraphindia, indianexpress). And the ministry of corporate affairs (MCA) will conduct an inspection of Byju's books in a bid to ascertain any potential corporate governance lapses. (economictimes)
Tiger Global has told select secondary investors they can bid on any private company in its portfolio after a lead buyer didn't emerge for a portfolio of assets packaged in a strip sale. (pitchbook)
New micro-cap index in the house! Motilal Oswal is out with a Nifty Microcap 250 Index Fund. Microcaps are identified as top 250 companies in terms of total market capitalization after Nifty 500 companies. The segment represents 3% of overall listed market capitalization. (MOMF, Index Metrics)
A roaring rally in mid- and small-cap stocks listed on Indian bourses could see abrupt corrections, as many of them trade at near or record highs even though overall consumption demand remains sluggish. (reuters)
Economy
GST evasion of Rs 30,000 crore unearthed in India. The identities of beneficiaries of PM Kisan and other social security schemes were allegedly used to operate 4,000 shell companies and 16,000 fake GST registrations. (economictimes)
Sensitive personal information, including details of identity documents such as Aadhaar and passports, of those who took or signed up for Covid-19 vaccines on COWIN was freely accessible for an unknown duration. (hindustantimes, indianexpress)
Complex rules make India seem permanently socialist. (livemint)
India's wheat harvest in 2023 is at least 10% lower than the government's estimate. (reuters)
India will cut tariffs for daytime power use but charge a premium when electricity demand peaks during the night, in a bid to manage surging demand and boost the use of renewable energy. (reuters)
The U.S Attorney's Office in Brooklyn, New York, and the SEC have sent inquiries in recent months to investors with large holdings in Adani Group, focused on what the Indian ports-to-power giant told them. (reuters)
The SEBI bars 135 entities over stock manipulation. The entities first pushed up stock prices by trading among themselves and followed it up by sending "buy" recommendations to the public through bulk messages via texts and websites. (reuters)
[US] Excess Retirements Continue despite Ebbing COVID-19 Pandemic (stlouisfed)
The market has given up hoping for rate cuts before Dec 2023, but is only pricing a peak Fed funds rate of 5.35% (@acemaxx)
UK government debt rises above 100% of GDP for first time since 1961. (theguardian)