Active Equity Management

Active Equity Management provides a comprehensive understanding of technical, fundamental, and economic signals used in equities trading. It explores in detail how such signals may be created, rigorously tested and successfully implemented. Filled with practitioner insights derived from years of experience in the hedge fund industry, and supported with academic theory, Active Equity Management provides an in-depth review of basic financial concepts, examines data sources useful for equities trading, and delves into popular seasonal effects and market indicators. It also highlights best practices in model development, portfolio construction, risk management, and execution. In combining topical thinking with the latest trends, research, and quantitative frameworks, Active Equity Management will help both the novice and the veteran practitioner understand the exciting world of equities trading. * Covers extensive data sources to build investing information, insight and conviction edges * Examines seasonal effects, explores economic & market indicators to make better trading decisions * Addresses technical and fundamental signal construction and testing * Explains dynamic factor timing strategies, portfolio construction and management * Reviews standard approaches for trade-level and portfolio-level performance measurement * Discusses implementation, trading cost analysis and turnover management Chapter 1 Introduction 21 Market Efficiency 21 Technical Analysis versus Fundamental Analysis 27 Quantitative Analysis 28 Active Mutual Funds and Hedge Funds 31 Fundamental Law of Active Management 33 Conclusion 37 Chapter 2 Data 39 Asset Identifiers, Descriptions, Prices and Volumes 40 Asset Identifiers 40 Asset Descriptions 42 Price, Volume, Dividends and Splits 43 Trade and Quote 44 Fundamental Data 45 Financial Reports 45 Analyst Estimations 45 Institutional Ownership and Insider Trades 46 Short Interest 46 Risk Models 47 Industry-Specific Data 47 Patents 48 Additional Data 50 News Data 50 Internet Data and Social Media Data 50 Economic Links 51 Option Data 52 Data Management 53 Conclusion 58 Chapter 3 Seasonal Effects 60 Seasonality in Market Returns 61 Presidential and Mid-Term Election Effect 61 Sell in May and Go Away 62 Santa Claus Rally 65 January Effect 65 Turn-of-the-month Effect 66 Option Expiration Week 67 Holiday Effect 67 Seasonality in Cross-Sectional Stock Returns 69 Industry Return Seasonality 69 January Effect – Market Cap 70 Options Max Pain 71 Intraday Return 72 Conclusion 73 Chapter 4 Economic and Market Indicators 75 Economic Activity Indicators 77 GDP 77 Retail Sales 78 Housing Activities 79 Employment Indicators 80 Purchasing Managers Index 82 Inflation, Interest Rate, and Currency Indicators 83 Price Indices and Commodity Prices 83 Interest Rate and Yield Curve 84 Currency Movement 85 Monetary and Fiscal Policies 86 Market Sentiment Indicators 88 Conclusion 91 Chapter 5 Technical Signals 93 Price, Volume and Volatility Measures 95 Trend Following Signals 96 Moving Averages 96 Momentum 100 Channel Breakouts 102 Trend Strength Indicators and Whipsaw Reduction 103 Mean Reversion Signals 107 Bollinger Bands 107 Relative Strength Index 108 Stochastic Oscillator 109 Volume-Adjusted Technical Indicators 112 On-balance Volume 112 Chaikin Accumulation/Distribution Line 112 Money Flow Index 113 Exit Strategies 115 Signal Reversion 115 Stop Loss and Trailing Stops 115 Price Targets 117 Time Stops 118 Momentum versus Mean Reversion Strategies 119 Technical Signals for Quantitative Portfolio Management 122 Momentum Signals 123 Short-Term Mean Reversion Signals 125 Technical Analysis for Fundamental Portfolio Management 128 Conclusion 130 Chapter 6 Fundamental Signals 132 Financial Statements 134 Factor Models and Residual Returns 139 Value Factors 142 Profitability and Efficiency Factors 150 Growth and Fundamental Momentum Factors 154 Sentiment Factors 158 Analyst Estimates 158 Management Actions and Statements 162 Institutional Ownership 166 Short Interest 167 Quality Factors 172 Earnings Quality 172 Agency Problem 175 Research and Development 176 Risk Factors 178 Business Risk 179 Financial Risk 179 Liquidity Risk 181 Beta and Idiosyncratic Risk 183 Skewness and Lottery Indicator 184 Conclusion 186 Chapter 7 Other Signals 188 Economic Links 189 Order Flow Indicators 191 Order Imbalance 191 Probability of Informed Trading 193 Volume-Synchronized Probability of Informed Trading 194 Equity Flow Indicator 195 Derivative Market and Bond Market Data 196 Option Data 196 CDS Data 198 Broker and Third-Party Research 200 Channel Checks and Expert Networks 200 Alpha Capture 201 News, Internet and Social Media 204 News Signals 204 Social Media, Blogs and Other Internet Sites 206 Industry-Specific Factors 209 Conclusion 212 Chapter 8 Performance Measures 214 Trade-Level Performance Measures 215 Portfolio-Level Performance Measures 217 Sharpe Ratio and Information Ratio 218 Other Risk-Adjusted Performance Measures 221 Leverage 225 Conclusion 228 Chapter 9 Signal Construction and Testing 230 Factor Score 231 Factor Z-Scores 231 Neutralization 235 Conditional Factors 236 Evaluation of a Single Factor 239 Return Measures 239 Information Coefficient 240 Hedged Portfolio Return 243 Turnover, Information Decay and Rebalancing 244 Stratified Models 247 Good Modeling Practices 250 Inaccuracies in Data 250 Data Snooping 251 Look-Ahead Bias 252 Survivorship Bias 253 Return Distribution 254 Stocks with Low Liquidity 255 Market Friction and Costs 255 Credibility of Simulated Results 256 Regime Shift 258 Conclusion 261 Chapter 10 Portfolio Construction and Risk Management 264 Mean-Variance Optimization 265 Risk Forecast 271 Sample Covariance Matrix 271 Fundamental Factor Models 273 Economic Factor Models 276 Statistical Factor Models 277 Limitation of Risk Models 279 Risk-Adjusted Information Coefficient 281 Return Forecast 285 Factor Group and Composite Factor Scores 285 Factor Interactions, Sequential Screening, and Selection Scores 288 Quantitative Linear Models 289 Short-Term Signals for Long-Term Investors 291 Nonlinear Models and Statistical Learning Approaches 292 Interaction between Return Forecast and Risk Forecast 296 Black-Litterman Model 300 Portfolio Constraints 307 Conclusion 310 Chapter 11 Dynamic Portfolio Construction 312 Factor Momentum 314 Macroeconomic and Market Factors 319 Economic Conditions 319 Market Regimes 321 Investor Sentiment 323 Valuation Spreads 325 Seasonality 327 Conclusion 328 Chapter 12 Statistical Arbitrage 330 Dual-Class-Shares Based Pairs Trading 331 Correlation-Based Pairs Trading 333 Cointegration-Based Pairs Trading 336 Benchmark-Based Statistical Arbitrage 342 Conclusion 344 Chapter 13 Other Investment Strategies 346 Other Strategies 347 Low Risk Strategies 347 Risk Arbitrage 349 Convertible Arbitrage 351 Commodities 353 Momentum Strategies 355 Backwardation Strategies 356 Hedging Pressure 357 Currency 360 Asset Allocation 365 Risk Parity Strategies 365 Tactical Asset Allocation 369 Alternative Beta Strategies 371 Conclusion 375 Chapter 14 Implementation 377 Trading Costs and Trading Risk 378 Trading Cost Components 378 Trading Risk 385 Pre-Trade Analysis 387 Trading Cost Models 387 Portfolio Optimization with Trading Costs 389 Volume and Volatility Patterns 392 Pre-Trade Report 394 Trading strategies 395 Execution Methods 395 Orders 398 Trade Schedule 399 Trading Venues and Order Routing 403 Post-Trade Analysis 406 Impact of High-Frequency Trading 408 Other Implementation Costs 411 Conclusion 412