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VALUE Factors Composite - Feedback requested please

Hi All,

Here's my 'pure' VALUE composite strategy, with my own way of defining 'Value' as a factor (hint: it's not low price to book ;)). Please let me know what you think.

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11 responses

And here's the alpha decay and risk exposure analysis.

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Looks great, Joakim!

Have you stripped out vanilla value? If anything, it looks like you have a small negative exposure to B/M

Thanks Antony!

I hadn’t actually. It’s ‘naturally’ slightly negative book to market value. Do you think that’s a concern?

Not at all, Joakim, I was just wondering if you had regressed your factor returns against B/M returns, perhaps, and worked with the residuals.

Solid! Great job as always, Joakim.

Nice, work Joakim! The alpha decay (although not much "decay") is very consistent. I like how you put your own spin on a value factor. We can see that in your risk exposure analysis and common style returns. I knew you'd come back with something new / different!

Thanks guys! My biggest worry (as always) is that it’s overfit.

Working on a GROWTH composite now and would like to do a QUALITY one as well eventually.

Definitely very stable! Look forward to seeing how it holds up OOS.

Thanks @Viridian, me too! (fingers crossed)

Here's the tear sheet for how it performed during the hold out period. Unfortunately it appears to correlate heavily with dog sh*t OOS, just barely meeting the requirement of being profitable for the last 2 years rolling... To be honest, I'd be surprised if it's overfit (the factors are pretty general I think), but it certainly appears that way. I plan to leave it running in the contest for at least 63 trading days though (assuming it doesn't fail the profitability requirement), hoping it'll at least be uncorrelated with my other strategies.

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Our strategies will always be overfit to some degree. That's unavoidable. The question is whether the remaining signal is adequately strong. Your OOS drawdown is twice your in-sample drawdowns, but -4% isn't terrible. It starts struggling during the 2019 recovery that followed the Dec 2018 correction. With valuation as stretched as they are, I would expect VALUE to do some really funky and volatile things at this point, especially when there's a lot of fear in the market of crash and when that fear subsides and the market decides it's still in growth mode and rates get cut anyway. Wild times. The projection curve isn't taking enough history into account, so I would take that with a grain of salt. I would definitely give it more OOS time.