Financial Anomalies in Asset Allocation: Risk Mitigation with Cross-Sectional Equity Strategies

The Journal of Portfolio Management, 49(1), 118-145, DOI: 10.3905/jpm.2022.1.422

Posted: 15 Apr 2022 Last revised: 19 May 2023

See all articles by Redouane Elkamhi

Redouane Elkamhi

University of Toronto - Rotman School of Management

Jacky S.H. Lee

Healthcare of Ontario Pension Plan Trust Fund

Marco Salerno

Healthcare of Ontario Pension Plan Trust Fund

Date Written: March 11, 2022

Abstract

There is a myriad of financial anomalies in the cross-section of equity returns. They have been widely studied in the literature, which gives investors a large choice in terms of investment styles. In this paper, the authors show a perhaps unappreciated quality of financial anomalies: they exhibit a strong counter-cyclical behavior. Specifically, some anomalies (e.g., Profitability and Investment) perform particularly well when traditional portfolios (e.g., 60/40 or risk parity portfolios) exhibit prolonged periods of negative drawdowns and during NBER recessions. With the exception of momentum strategies, the authors do not find evidence that financial anomalies are inflation hedging. Last, the authors examine whether financial anomalies lead to better portfolio performance. The results show that combining anomalies based on their style and then adding them to a traditional portfolio leads to higher Sharpe ratios overall, while also limiting portfolio losses during recessions.

Keywords: Portfolio Allocation, financial anomalies, absolute return strategies, alpha strategies

JEL Classification: G10, G11, G12

Suggested Citation

Elkamhi, Redouane and Lee, Jacky and Salerno, Marco, Financial Anomalies in Asset Allocation: Risk Mitigation with Cross-Sectional Equity Strategies (March 11, 2022). The Journal of Portfolio Management, 49(1), 118-145, DOI: 10.3905/jpm.2022.1.422, Available at SSRN: https://ssrn.com/abstract=4055624

Redouane Elkamhi

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Jacky Lee (Contact Author)

Healthcare of Ontario Pension Plan Trust Fund ( email )

1 York Street
Toronto, Ontario M5J0B6
Canada

Marco Salerno

Healthcare of Ontario Pension Plan Trust Fund ( email )

1 York
Toronto, Ontario M5S 3G8
Canada

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