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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