On Tuesday, I’m going to be talking about a market-neutral trading strategy that has made money for hedge funds for a long time. It was documented in the below form by Mary E. Barth and Amy P. Hutton, and it goes like this:
→1. Rank publicly traded firms by amount of balance sheet accruals (as percentage of total assets) and sort into ten evenly-divided groups.
→2. Take the top and bottom deciles, and watch for any analyst earnings forecast revisions for those firms.
→3. Short firms in the top decile who receive a downward revision, and go long any firms in the bottom decile who receive an upward revision.
→4. Hold stocks for one year for a 16-year average market-neutral return of ~28.5%.
*This strategy has doubtless been arbitraged away in the above form. One would need to do one’s own research to find ways to capitalize on this phenomenon, which, strangely, appears to have persisted for much longer than one would expect given the “efficiency” of the markets.
**This is purely for informational purposes and does not constitute investment advice.
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