Tuesday, March 15, 2011

Lipstick on a Pig

Cliff Asness & colleagues have just published a paper demanding critics rethink the "Japanese equity markets are a momentum graveyard" thesis. They attempt to salvage the pursuit of price momentum in Japan by arguing that momo and value should be seen as a system, and not in isolation. Fair enough. As a result, they argue, momo strategies have utility in such a system, and therefore, the nil return (before costs) that have acrued to momo in Japan over the past 29 years is a veritable virtue. IF, that is, a more optimal Sharpe Ratio is one's goal, and so it follows, therefore, that a nil-return dollar-neutral portfolio, which furthers this pursuit, shouldn't tarnish the pedestal upon which momo strategies rest, both in other equity markets and across other asset classes.

As Noam Chomsky is often revealed be, (a comparison Dr Asness will abhor), Asness is correct within the narrow epistemological framing of the question. But this is not setting the bar particularly high. Not in a discipline where descriptive information is abundant, and where the pursuit should yield something better than a "Dawkin's Skyhook" approach to describing the faceless catch-all that is in each occurance a likely alias of some more descriptively-articulate phenomena. Of course, we can foregive this oversight for Dr Asness, wouldn't be a very good business-man if he revealed what lay beneath this nebulous outer layer of the onion skin.

One would hope that, for their investors, they are delivering higher-calibre solutions to the task of delivering a more optimal - primarily value-based - dollar-neutral portfolio in Japan, for they do exist. But do not expect in this paper a monumental revelation, or a raison d'etre to crank up a 6-1, or 12-1 portfolio in Tokyo. This is just lipstick on the Japanese momentum pig.