Time-series momentum and a long/short portfolio focused on the quality factor provide valuable overlays for equity portfolios.
Strategic re-balancing, incorporating findings on time-series momentum, can lead to much greater efficiencies in managing portfolios.
Deep dives
The Information Content of the Yield Curve and Campbell Harvey's Contributions
Campbell Harvey, a prominent academic and investment strategy adviser, has made significant contributions to understanding the information content of the yield curve. His early research focused on the yield curve's ability to predict economic growth and recessions. Harvey's work showed that the slope of the yield curve is valuable in gauging economic conditions and has correctly predicted several recessions. Additionally, Harvey discusses the importance of time series momentum and the quality factor as valuable overlays for equity portfolios. He also emphasizes the benefits of strategic re-balancing and the potential of defi (decentralized finance) in revolutionizing the financial industry.
Value Investing and the Resurgence of Value Stocks
Harvey's research also explores the value factor in investing. He highlights the persistence and relevance of value investing, debunking notions that value stocks are no longer worth considering. Although value stocks experienced a significant underperformance for a decade, Harvey argues that the fundamental drivers of the value premium remain robust. He explains the relationship between risk and misvaluation in value stocks and highlights that the value of value can become extreme, leading to reversion and potential substantial returns.
Strategic Risk Management and the Importance of Convexity
Harvey's book on strategic risk management delves into the concept of introducing positive convexity into investment portfolios. He emphasizes the importance of time series momentum and volatility targeting in managing portfolio risks. By incorporating these strategies, portfolios can mitigate drawdowns and improve resilience in times of market volatility. Harvey also introduces the concept of strategic re-balancing, which involves timing re-balancing actions based on market signals, and emphasizes its effectiveness in reducing drawdown severity.
The Rise of Decentralized Finance (DeFi)
In his teaching and research, Harvey explores decentralized finance (DeFi) and its potential to transform the financial industry. DeFi utilizes blockchain technology and algorithmic trading to provide transparent, 24/7, and inclusive financial services. DeFi encompasses decentralized exchanges, savings platforms, lending platforms, and tokenization. Harvey predicts that DeFi will revolutionize the financial system, eliminating intermediaries, democratizing access to financial services, and tokenizing a wide range of assets. He believes that within the next 15 years, the financial landscape will undergo massive changes driven by DeFi.
Our conversation focuses on his current work as an Investment Strategy Advisor at Man Group where he has done work on the idea of crisis alpha: strategies that can effectively offset portfolio losses suffered during risk-off events. Campbell and his colleagues find that both time-series momentum as well as a long/short portfolio focused on the quality factor both have insurance-like characteristics and can be valuable overlays for equity portfolios. He also shares his work on rebalancing, where he sees alpha destruction if done in traditional form, but the opportunity for much greater efficiencies by incorporating some of the findings on time-series momentum. Lastly, we discuss Campbell’s new book, “DeFi and the Future of Finance”. As the title may imply, he’s bullish on the breathtaking pace of innovation in the financial services industry. I hope you enjoy this episode of the Alpha Exchange, my conversation with Campbell Harvey.
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