No. of Recommendations: 2
I am a big fan of Faber. Thank you for posting that link to Mr. Arnott's article on SSRN. There are some eye popping results from his out of sample testing of factor "conventional wisdom". I read a lot of factor articles on the investing boards and many hedge fund managers tout their factor tilts and expertise. This paper confirms what I've been suspecting as I read more and more articles saying well, the "value" factor has worked great for 20 years and while it hasn't worked for the last four it will again so get positioned now. As the paper suggests, maybe the "value" factor comes back...maybe not. These returns are not normally distributed and there has been a LOT of curve fitting in those back tests.
The fast drop off in factor returns once they are discovered is proof IMHO that this high frequency trading environment we are in leaves few exploitable factors for the retail investor to use.
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