How Can a Strategy Everyone Knows About Still Work?
Can an investment strategy still work even when many market participants know about it? PLY Strategies shares an article by Cliff Asness, Co-Founder and Chief Investment Officer of AQR Capital Management, “How Can a Strategy Everyone Knows About Still Work?”
If an investment strategy is widely known, a natural question arises: why haven’t market participants already arbitraged away the opportunities it offers? In the article, Cliff Asness explores why certain well-known factor-type strategies may continue to work even when their underlying principles are no longer a secret.
The article focuses on classic factor-type strategies, including value, momentum, carry, and quality/defensive, with value used as the primary example.
Why can a well-known investment strategy still work?
The article discusses two main explanations: risk premiums and investor behavior.
If the return of a factor strategy represents compensation for taking on risk, the fact that the strategy has become widely known does not necessarily eliminate the underlying reason for its expected return.
Another explanation relates to investor behavior and recurring errors. If these behavioral patterns persist, they may help explain why certain investment strategies do not lose their effectiveness simply because they have become widely known.
What happens when an investment strategy becomes popular?
A strategy becoming widely known does not mean that nothing changes. The article examines how increasing popularity can affect a strategy’s expected returns and risks.
It also discusses crowding risk – a situation in which many market participants follow the same investment strategy. As a strategy becomes more popular, large capital flows can become an additional source of volatility and risk.
However, the fact that a strategy is widely known does not necessarily mean that its expected return must disappear entirely.
What should investors consider when evaluating an investment strategy?
The article highlights that a strategy’s popularity alone is not enough to conclude that it will no longer work. If the strategy has a sound rationale, strong in-sample and out-of-sample evidence, and no clear signs that its opportunities have been arbitraged away, it may still be worth considering.
Therefore, the question is not simply “Does everyone know about this strategy?” More importantly, investors should understand why an investment strategy works and whether the reasons behind its effectiveness are still present.
This perspective is particularly relevant to PLY Strategies, which applies several well-known investment strategies and evaluates them based on data, long-term evidence, and clearly defined rules.
Read more from PLY Strategies
We invite you to read “How Can a Strategy Everyone Knows About Still Work?” and explore other research selected by PLY Strategies on investing, ETF strategies, and long-term investment management.
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