Just Bet Against Everything?

Is there an effective Betting Against Alpha (BAA) strategy analogous to the widely used Betting Against Beta (BAB) strategy? In his October 2017 paper entitled “Betting Against Alpha”, Alex Horenstein investigates relationships between stock 1-factor (market), 4-factor (market, size, book-to-market, momentum) alpha and 5-factor (profitability and investment instead of momentum) alphas and future stock returns. He specifies BAA as a portfolio that is long (short) the capitalization-weighted stocks with realized alphas lower (higher) than the median alpha, rebalanced annually. He further specifies Betting Against Alpha and Beta (BAAB) that: (1) first divides stocks into a group with market betas below the median beta and a group with betas above the median; and, (2) then forms a capitalization-weighted portfolio that is long low-beta stocks with alphas below the median alpha within the low-beta group, and short high-beta stocks with alphas above the median alpha within the high-beta group. Additionally, he scales the long and short sides of both portfolios by the inverse of weighted betas, such that average portfolio market betas are near one. In other words, he applies leverage to side of the portfolio with high (low) aggregate beta of less (more) than one. For robustness, he also tests 1-month, 6-month, 24-month and 48-month portfolio reformation intervals. Using monthly data for a broad sample of U.S. stocks during January 1968 (with the first five years used for initial alpha and beta values) through December 2015 and contemporaneous factor model alphas, he finds that: (more…)