How Do You Know if a Strategy Is Too Expensive?

When we invented fundamental index back in 04, we did not think to look at relative valuation. When the quant crash happened in August of 2007, there were some strategies that lost literally thousands of basis points of performance in three days. If we had done this work on relative valuation at the time, we would have seen values expensive avoid value, small cap is expensive, avoid small cap, momentum is expensive,avoid momentum. It's a little bit interesting because it helps us understand our own strategies are likely to be disappointing.

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