PT  - JOURNAL ARTICLE
AU  - Elkamhi, Redouane
AU  - Lee, Jacky S. H.
AU  - Salerno, Marco
TI  - Financial Anomalies in Asset Allocation: Risk Mitigation with Cross-Sectional Equity Strategies
AID  - 10.3905/jpm.2022.1.422
DP  - 2022 Oct 31
TA  - The Journal of Portfolio Management
PG  - 118--145
VI  - 49
IP  - 1
4099  - http://jpm.pm-research.com/content/49/1/118.short
4100  - http://jpm.pm-research.com/content/49/1/118.full
AB  - 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 article, the authors show a perhaps unappreciated quality of financial anomalies: They exhibit strong countercyclical 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 National Bureau of Economic Research (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.