The efficient markets hypothesis (EMH), developed by Eugene Fama in the 1960s, simply states that prices reflect all available information. Despite its simplicity, the EMH has been difficult to test and generated decades of debate. In this video, Gene and Richard Thaler, a founding father of behavioral economics, discuss whether markets are efficient. Despite some areas of discord, Thaler sums up an important point of agreement: “Stock markets, good or bad, are the best thing we got going. So, nobody’s devised a way of allocating resources that’s better.”
Long/Short (LS) strategies buy one equity portfolio and short another. They are often sold as a way to add a premium with special diversification benefits that arise because the premium is not highly correlated with the rest of an investor’s equity portfolio. We provide examples to show how to evaluate these claims.
Portable alpha is the return from an active investment strategy that has no exposure to some index, such as the S&P 500 or the Russell 2000. It is often sold as a way to get the benefits of active management at lower cost. For the moment we leave aside whether there are benefits to active management and focus on the claim about costs.
EFF/KRF: Our strategies for choosing papers are similar. Sometimes we don’t have a choice. If we agree to referee a paper or discuss it at a conference, we are certain to read it, and we read most of the papers our colleagues write.
David Booth, chairman and co-CEO of Dimensional Fund Advisors, has been working with Eugene Fama since the mid-1960s. David was a PhD student in Gene’s class and later asked Gene to become a board member when Dimensional got off the ground in 1981. Gene is the principal scholar whose groundbreaking work inspired the firm’s founding, continues to advise the firm on many of its strategies, and is also a frequent speaker at Dimensional conferences and seminars. In this video, they discuss Gene’s early influences, the history of modern finance, the longtime collaboration between Gene and Ken French, the philosophy underlying Dimensional’s approach to investing, financial advisors, the five-factor model, Gene’s Nobel prize, and more.
EFF/KRF: The short answer: usually almost nothing.
EFF/KRF: Unfortunately, daily returns don’t provide more information.
EFF/KRF: There is some confusion about the interpretation of the evidence in Fama and French (2014, “A Five-Factor Model of Expected Returns”) that HML is redundant for explaining average U.S. stock returns for 1963-2013.
KRF: Gene Fama has taught us a lot over the last 50 years. In this essay, I describe some of the things Gene has taught me about doing research, writing papers, and life in general.
Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.