An investment strategy that takes advantage of behavioural biases such as confusion, market over or under-reactions, or an inability to rationally combine several pieces of information, could offer attractive returns according to AXA Investment Managers (AXA IM).

The investment manager’s proprietary research, Multi Premia Strategy - using behavioural finance with the aim to deliver uncorrelated returns, outlines how biases can affect trading behaviour and cause market volatility. “Asset managers with the ability to identify these factors have an opportunity to improve their returns,” says Pierre-Emmanuel Juillard, managing director, AXA IM Chorus.

Pierre-Emmanuel Juillard

“Our in-depth report shows markets are inefficient in the short term, and although these inefficiencies tend to be small, they’re not random, and we think, can be predicted.” Juillard believes investors wanting to take advantage of these small inefficiencies need to deploy an investment process that covers a large number of securities and signals. New data and techniques such as machine learning are also critical in helping to identify these alpha-making opportunities.

Implementing behavioural Finance

Behavioural finance has three applications for asset managers:

  • firstly, to correct the forecasting biases of investors
  • secondly, to infer relevant information from the behaviour of smart investors
  • thirdly, to monetise institutions’ predictable behaviour

It is possible to adopt a multi-premia strategy that incorporates all of these applications using analytical tools. These include taking advantage of new data sources such as news and forecasts to identify information that has been neglected, and to analyse momentum or stock valuation. For example, stocks with a low price-to-book ratio typically outperform those without.

“Structural constraints can also play a role in generating returns. For example, according to our proprietary research, regulatory pressures may prevent some investors from holding certain assets, which creates value for other, less constrained, investors,” says Juillard, adding that another source of premia is a price mismatch, where for example, two companies operating in an industrial sector may have sufficiently similar businesses models to warrant a similar valuation, but they ultimately do not. This mismatch could be exploited by going long on the undervalued stock and short on the overvalued equity.

Liquidity and viability

For a multi-premia strategy to be viable, it must occur in liquid assets. Further, there should be low levels of correlation between different premia and asset classes. As the report states, constant research is required in new investment premia, either through new ideas or through the use of newly available datasets, to keep a multi-premia strategy at the forefront of the risk-return trade-off. Achieving this is not easy, since it requires a depth of resources to invest across global markets, and the ability to manage risk factors linked to the strategy, including correlation, model and leverage risks.

Ultimately, the proprietary research urges those seeking alpha to remember the importance of looking through market noise to find true investment premia. A lack of correlation can also help the strategy to perform well in times of market stress.

AXA IM Chorus

Guided by Juillard, AXA IM last year launched its multi-premia strategy with initial assets under management of over US$1 billion. The strategy is managed by AXA IM’s new investment team in Hong Kong, AXA IM Chorus.

The multi-premia strategy seeks to provide capital growth with an expected low correlation to traditional asset classes. AXA IM Chorus offers investors access to a diversified set of strategies across a broad range of assets including equities, interest rates and currencies on all global markets. Leveraging different investment premia across a wide asset classes and instruments potentially generates attractive returns, and has the added bonus that such strategies should generally provide diversification.

For more information about AXA IM Chorus multi-premia strategy or investment management, please email here.

Sources: AXA IM as at August 2018.

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