IFTA2020: The end of alpha - Risk Factors Theory revisited

Risk pre­mia and Style Fac­tors theo­ry have been very popu­lar during the­se recent years with a lot of busi­ness impli­ca­ti­ons in the asset manage­ment business.

What are the key issues ? One of the first objec­ti­ve of fac­tors prin­ci­ples was to save CAPM and Effi­ci­ent Mar­ket Hypo­the­sis theo­ries via a signi­fi­cant impro­ve­ment. The second objec­ti­ve was to under­mi­ne the prot­ago­nists of alpha. The idea that one can   any port­fo­lio per­for­mance with an expo­sure to spe­ci­fic betas (value, size, qua­li­ty or wha­te­ver…) was poten­ti­al­ly the end of alpha… It was mea­ning for ins­tance  that Tech­ni­cal Ana­ly­sis was defi­ni­te­ly useless!

Hop­eful­ly, we will see that in rea­li­ty, some fac­tors com­mon­ly used in the indus­try such as momen­tum or Low Vola­ti­li­ty are curious­ly not taken up by the Fama & French model. And for good reasons: the­se fac­tors based on beha­vi­oral bia­ses com­ple­te­ly con­tra­dict the­con­clu­si­ons of CAPM theo­ry and ren­der it obsolete.

Thus, we’ll con­clude that the fac­tors theo­ry rein­forces the beha­viou­rist prin­ci­ples, jus­ti­fy­ing the use of tech­ni­ques to bene­fit from them. It streng­thens the use of Tech­ni­cal ana­ly­sis while finan­cial theo­ry needs to reinvent its­elf in order to retain some credibility.

Thier­ry Bechu: Bachelor’s degree in Eco­no­mics  and Master’s degree in Finan­ce – Orlé­ans University.

Star­ted as Finan­cial Ana­lyst in a stock bro­kera­ge com­pa­ny whe­re he dis­co­ver­ed the TA world and moved to this space as Tech­ni­cal Analyst.

He co-wro­te a french book on TA, almost the first one on this topic. It had a lot of suc­cess (more than 30k books sold), a best-sel­ler for the edi­tor Economica.

He also par­ti­ci­pa­ted to the crea­ti­on of AFATE, french asso­cia­ti­on for TA

Then He moved to the tra­ding space with various posi­ti­ons at Dresd­ner Bank, Com­merz­bank in Frank­furt, and Socié­té Géné­ra­le in Paris and Lom­bard Odier in Geneva

In the mean­ti­me, he moved from the PT side to the HF indus­try facing cli­ents and invest­ments constraints.

More recent­ly he had the oppor­tu­ni­ty to take over the mul­ti-asset busi­ness for euro­pean pen­si­on funds and work­ed deep­ly on Risk-based stra­te­gies and on fac­tor based investments.

Sin­ce 2018, he is CIO at Aequam Capi­tal, a quan­ti­ta­ti­ve asset manage­ment bou­tique spe­cia­li­zed in Risk Fac­tors. Thier­ry also tea­ches TA and Risk Fac­tors at Paris-Dau­phi­ne University.

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