Custom Direct Indexing: Benefits of Separately Managed Accounts with Tax Loss Harvesting
We review opportunities for taxable investors to improve the outcomes of their overall portfolio.
BKLN White Paper Series | Q3 2022How Can Tax Loss Harvesting and Custom Direct Indexing Enhance Portfolios? A Conversation with Brooklyn’s Chief Investment Officer Erkko Etula and Head of Equities Antti Petajisto, Q1 2023.
BKLN White Paper Series | Q1 2023We review opportunities for taxable investors to improve the outcomes of their overall portfolio.
BKLN White Paper Series | Q3 2022How Can Tax Loss Harvesting and Custom Direct Indexing Enhance Portfolios? A Conversation with Brooklyn’s Chief Investment Officer Erkko Etula and Head of Equities Antti Petajisto, Q1 2023.
BKLN White Paper Series | Q1 2023We document that the prices of exchange-traded funds can deviate significantly from their net asset values, especially in funds holding international or illiquid securities. We introduce a novel approach to control for stale pricing of the underlying assets and confirm that the mispricings are real. Cost-conscious ETF investors should be aware of these potential hidden costs.
Financial Analysts Journal (lead article)We find that the index premium for the S&P 500 and Russell 2000 has historically averaged +8.8% and +4.7% for additions, respectively, and -15.1% and -4.6% for deletions. We introduce a new concept that we label the index turnover cost, which represents a hidden cost borne by index funds (and the indexes themselves) due to the index premium. We estimate its lower bound as 21-28bp annually for the S&P 500 and 38-77bp annually for the Russell 2000, which is much larger than the management fees of many index funds.
Journal of Empirical FinanceWe use Active Share and tracking error to sort active mutual funds into style groups. We find that the most active stock pickers have outperformed their benchmark indices even after fees and transaction costs, while closet indexers have been reliable underperformers after expenses. Closet indexing increases in volatile and bear markets and has become more popular over time.
Financial Analysts Journal, Winner of the Graham and Dodd Scroll Award (top 3 FAJ paper)Standard academic factor models produce economically and statistically significant nonzero alphas even for passive benchmark indices such as the S&P 500 and Russell 2000. We track down the issues behind this, propose alternative models and show that they outperform the standard models in common applications such as performance evaluation of mutual fund managers.
Critical Finance Review (lead article), Winner of the Commonfund Best Paper Prize at the EFA Annual MeetingWe find that a simple global long-short strategy betting on high earnings quality produces a higher Sharpe ratio than the overall market or similar strategies betting on value or small stocks. Because the earnings quality portfolio has a negative correlation with a value portfolio, an investor wishing to invest in both exposures can achieve significant diversification benefits.
Working PaperWe present broad-based evidence that the monthly payment cycle induces systematic patterns in liquid markets around the globe. We document temporary increases in the costs of debt and equity capital.
The Review of Financial StudiesFinancial intermediaries trade frequently in many markets using sophisticated models. Their marginal value of wealth should therefore provide a more informative stochastic discount factor than that of a representative consumer.
Journal of Finance, Winner of Amundi Smith Breeden Distinguished Paper PrizeStrategic asset allocation is arguably one of the most important, yet least advanced, aspects of investing. We present a new approach to strategic asset allocation that leverages the idea that long-term investment returns derive from multiple distinct sources.
Journal of Portfolio ManagementWe show that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity derivatives markets.
Journal of Financial Econometrics, Winner of Engle Prize in Financial EconometricsWe decompose the U.S. dollar risk premium into components associated with macroeconomic fundamentals and a component associated with financial intermediary balance sheets.
European Economic ReviewWe describe use cases of blockchain technology in finance.
Global Fintech: Financial Innovation in the Connected WorldWe develop a machine learning method for automatically generating models of dynamic decision-making that both have strong predictive power and are interpretable in human terms.
IEEE PressWe show that the fundamental legal structure of a well-written financial contract follows a state-transition logic that can be formalized mathematically as a finite-state machine. By conceptualizing and representing the structure of a financial contract in this way, we expose it to a range of powerful tools and results from the theory of computation.
Artificial Intelligence & LawWe explain how computable contracts, coupled with automation, can drive innovation in the insurance business.
MIT Computational Law ReportWe present the first computational model of human behavior in repeated Prisoner’s Dilemma games that unifies the diversity of experimental observations in a systematic and quantitatively reliable manner.
Plos OneClimate-contingent finance is a fresh approach to addressing catastrophic risk, building a bridge between long-term funding needs and financial risk management. It can be generalized to any situation where multiple entities share exposure to a risk where they lack direct control over whether it occurs (e.g., climate change, or a natural pandemic), and one type of entity can take proactive actions to benefit from addressing the effects of the risk if it occurs (e.g., through innovating on crops that would do well under extreme climate change or vaccination technology that could address particular viruses) with funding from another type of entity that seeks a targeted financial return to ameliorate the downside if the risk unfolds.
Berkeley Business Law JournalWe define Environmental Impact Bond mechanics, elucidate the difference between EIBs and Green Bonds, and propose a common vocabulary for the field.
Environmental Research: Infrastructure and SustainabilityWe present a simulation model as a computational test-bed for climate prediction markets. Traders adapt their beliefs about future temperatures based on the profits of other traders in their social network.
IEEE PressWe built an open-source AI tool to produce short-term forecasts of vegetation health at high spatial resolution, using data that are global in coverage.
International Journal of Remote SensingOur simulation models show that a farmer using seasonal forecasts has more diversified crop selections, which drive increases in average agricultural income.
Environmental Research LettersWe review models and literature regarding climate change adaptation, and present an argument in favor of using various computational modeling tools.
Climate & Development