5

What metric describes a mutual fund that consistently performs a little better than the average of its peers (or its index) when the market is rising but falls much faster than its peers or its index when the market is falling?

I own several of these, and over the long term (10+ years) they have all tended to average out, but I'd like to look for alternatives that more closely track their peers (or index) to avoid having to time trades based on recent overall market movement.

9

It seems like this is an example of Dual Beta:

In investing, dual-beta is a concept that states that a regular, market beta can be divided into downside beta and upside beta.

Essentially the beta (and intercepts) are calculated separately for up periods and down periods. So in your case, you seem to have an upside beta of slightly more than one but a large downside beta.

Note that a more modern technique is to calculate a portfolio's risk with respect to multiple factors rather than just a single overarching market factor. Those factors might give you more insight into exactly why your downside beta is higher. For example, you might have a high "volatility" factor, and downside changes tend to be larger (hence larger volatility). Or you might have a higher sensitivity to market size, where smaller-cap stocks might see larger drops in down markets. But calculating those factors is not trivial and is generally limited to large institutional investors.

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  • Bingo! You nailed it -- this is exactly the metric I was looking for, but never heard of. Much appreciated. – MTA Jan 6 at 22:34
4

That sounds like β.

https://en.wikipedia.org/wiki/Beta_(finance)

In finance, the beta (β or beta coefficient) of an investment is a measure of the risk arising from exposure to general market movements as opposed to idiosyncratic factors.

A beta greater than 1 generally means that the asset both is volatile and tends to move up and down with the market.

So, an investment with a Beta greater than 1.0 would rise faster than "the market", and fall faster than "the market".

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  • Can a beta greater than 1.0 be further nuanced to describe the movement I mentioned? Rising just a little faster but falling much faster? – MTA Jan 6 at 22:12
  • @MTA that's what puzzled me. Hopefully someone else will have a better answer in the next 4 hours. – RonJohn Jan 6 at 22:14
  • "Can a beta be greater than 1.0?" Yes... it can. A Beta of 1.10 would mean that there is "10%" more movement up or down vs. the relative market comparison. investopedia.com/investing/beta-gauging-price-fluctuations – THEAO Jan 6 at 22:21
  • @MTA *24 hours. – RonJohn Jan 6 at 22:24
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    @theao What I'm seeing is a beta of something like 1.05 in a rising market and 1.25 in a falling market. Is there a name for that? Or a separate metric? – MTA Jan 6 at 22:25

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