Exane X3

3 complementary sources of alpha to deliver a robust "Absolute Performance", uncorrelated to markets


Exane X3 combines 3 different and complementary sources of Alpha (Market inefficiencies).

It aims to deliver a robust absolute performance, even during shifts in market regimes, with little correlation to Equities, Credit and Rates.

X3 has no directional biases : a constant 0% exposure to market is targeted (daily adjustement).

It features as well a volatility reduction mechanism,known as "Equal Risk Contribution".

Source: Exane BNP Paribas as of April 2018 (including backtest period since 2003)


Exploiting market inefficiencies

Factor Investing

Factors are individually risky by essence, and each one can episodically lose money: their ‘alpha’ is cyclical. It is precisely because such factors episodically lose money that there is a long-run reward for being exposed to these factors. 

Our Approach to Factor Investing

Fundamental criteria, based on Equity Research, can improve drastically the quality and associated-risk when picking Stocks based on Factors. 

This helps to reduce the risks linked to a Factor (e.g. non sustainable factor, balance sheet issues, "Value Traps"...), and more generally improve the performance  / strength of a factor.

This results into a more robust, less cyclical alpha.

Improved factors outperform

The long term backtest and the real track of our factors confirm their ability to outperform almost systematically their MSCI equivalent.

Smart Factor Investing


Factors have different periods of alpha generation. When associated, they can therefore provide real diversification benefits.

This is particularly true during changes of trends in Equities, with some factors starting to outperform while some other may temporarily underperform (eg Value vs Low Volatility during beta rally) 

By combining factors, X3 removes a significant part of the cyclical feature inherent to each factor.

The effectiveness of the combined approach derives from the negative correlation between the styles (eg Low Vol vs Value). 

While timing factors remains particularly difficult, combining factors proves efficient as regard both alpha generation and risk / draw down management.

Factors generate a sustainable alpha

Each factor is a source of alpha over time (risk premia, market inefficiencies). There are thus many periods where the 3 factors are simultaneously delivering alpha.

Shifts in market regimes

When there are shifts in market regime, some factors may suffer while others start on the contrary to deliver a strong performance.

This can be observed for instance during those major shifts in the past decade:

  • The 2008 financial crisis (risk off), followed by the 2009 beta rally (risk on)
  • The Euro crisis, triggered by the Greek issue (risk off)
  • The various shifts recently, starting from the stress on Emerging Countries / China, Brexit, rate hikes, Trump rally

A significant reduction of risks metrics

This benefits to X3 M/N which features appealing risks metrics:

  • volatility halved: 3.7% vs. an average volatility of 7.0% for our 3 factors.
    • a max Draw Down divided by three (-4.8% vs. an average of -13.8%).

    Extracting Alpha

    from factors

    The 'Alpha' of each factor is extracted in rigorous “Market Neutral” strategy, with no market exposure (daily Beta adjustment).

    Our 3 Market Neutral strategies feature an appealing average performance in the 7-9% range, but with some cyclicality leading to important max Draw Down (from 9% to 18%).

    The construction of the global strategy is also designed to limit the implementation costs.


    3D VALUE M/N


    Data as of 23 Mar 2018

    X3 Design

    The quest for robustness


    1. Factors fueled with Fundamental criteria

    The "Stock Picking" can lead to some risks specific to each FACTOR - eg Value Traps on "Value Investing".

    We use systematically "Fundamental Factors" to limit the risks on stock picking, and improve the performance as well.  

    2. Diversification: 150 stocks on average

    The association of our 3 factors leads to a diversified strategy, with 150 shares on average in the "long leg" and a minimum of 130 shares since 2003 observed in our backtest. The maximum weight is limited to 2.1%.

    3. A dynamic allocation on our 3 factors

    The weight of each factor is dynamically adjusted every month, depending on its risk (volatility) and its diversification benefits (correlation vs other factors).   

    This dynamic allocation intends to minimize both the volatility and the draw down of Exane X3.



    Data as of 23 Mar 2018

    X3 Performance





    Following the winners

    The “MOMENTUM FACTOR” :  A robust and persistent source of alpha, mainly attributable to behavioural biases.

    • The Momentum Factor can be explained by the TREND of securities to persist in the performance over a long period of time.  Short Term reversion is an opposite factor that can hammer the factor performance.
    • Numerous academic studies confirm the power of the "momentum" factor, which is often considered superior to that of other "factors“
    • The momentum style is characterized by a strong turnover. It features also a mechanical "stop loss" (an under performing stock will be mechanically excluded from the selection at the next rebalancing)
    • A true source of diversification: the "Momentum" factor is weakly correlated with other traditional "factors" (Value, Low Vol, Quality). It is also the only"factor" that allows investing (and divesting) in “concept stocks” or bubbles
    • A factor not so popular despite remarkable performance: few funds seek to capture the "momentum factor", while paradoxically investors tend to invest in funds with strong momentum (ie outperforming peers)


    Buy stocks on a bargain basis or not at all

    “Experience teaches us that the time to buy stocks is when their price is unduly depressed by temporary adversity. In other words, they should be bought on a bargain basis or not at all”

    Benjamin Graham

    The underlying idea is always the same: buying mispriced securities.

    There are however many ways to apply it, from buying distressed, low-quality assets to choosing well-established firms that have fallen out of favour and are discounted.

    The “Value style” is often biased towards cyclical industries, and features high volatility/beta  and brings a strong diversification effect:  the “Value style” is performing the best during “garbage” rally / pain trade (where most conservative / quality oriented strategies suffer)

    We have derived our view from our research analysts, using the most widespread factors across sectors / industries,which brought us to build our “Value in 3 dimension” approach

    Low volatility

    The greatest anomaly in Finance


    The basic premise of the CAPM is that all agents invest with the highest expected Excess Return  per unit of risk…and leverage or de-leverage their portfolio to suit their risk preferences

    EXPECTED RETURN = Risk Free Rate + beta x market risk premium


    Contrary to the theory, the least volatile stocks outperform the market (risk adjusted). The derives mainly from

    • behavioral bias from investors,
    • investment constraints (eg leverage often not authorized for a Fund Manager)


    The "Low Volatility" style is often associated with "Quality". There are however inherent risks for the "least volatile" stocks, such as :

    • Some stock are not volatile simply because they have little growth potential and are consequently shunned by investors.
    • Some "low volatility" stocks trade at an excessive premium, and face therefore asymmetrical risks: a derating, or even "just in line" results can lead to important losses

    We limit our risks on picking with fundamental factors, across valuation, growth, earnings revisions, and risks.