Efficient Construction of Linear and Nonlinear Equity Risk Strategies

This dissertation addresses the challenges raised by a change in paradigm recently observed in the asset management industry. Investors are moving from active management towards passive investments, as evidenced by the massive inflows to passive index funds and ETFs. In this new economic context, we analyze the optimal design of passive linear and nonlinear equity-based investment strategies and highlight four of our main findings on active and passive portfolio management practices. First, we find that long-short equity hedge funds are sophisticated beta providers as they demonstrate exposures to linear and nonlinear sources of risk difficult to capture in the early period of our sample. Second, we observe that directional hedge funds exhibit complex nonlinear payoffs, which highlight the sophisticated nature of these funds to provide investors
access to nonlinear exposures. Third, we review the definition of the methodologies, which sort stocks in portfolios, and show that it plays a determinant role in obtaining efficient smart beta strategies. Fourth, we uncover that probabilistic functions recovered from option price sensitivities contain determinant information for predicting future stock returns.