MATT LEVINE: Are banks worthless? The case can be made ...
'Hedge-fund managers come to work and do stuff all day, but statistical analysis reveals that they could be replaced by a set of linear exposures to the seven-factor Fung and Hsieh model'
Why banks? Here is a hilarious paper from Juliane Begenau of Stanford and Erik Stafford of Harvard called "Do Banks Have an Edge?" No, is their answer. You'd be better off just passively buying Treasuries than buying the complicated mix of stuff that banks actually own: We construct a simple buy-and-hold portfolio that each month purchases a six-year maturity UST and holds it to maturity, such that the three-year average maturity of this portfolio matches that of the aggregate banking sector. This is a highly conservative benchmark as it does not charge for the credit and illiquidity risk that banks have added to their asset portfolios, both of which realized positive risk premia in capital markets over this period. Remarkably, we find that the unlevered bank assets, inclusive of their share of operating expenses, underperform passive maturity-matched investments in US Treasury (UST) bond portfolios over the period 1960 to 2015. This suggests that the specialized asset-based activit...
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