What is the Night Effect?
The “Night Effect” reflects the differentiated source of returns and volatility (risk) within equities by avoiding exposure when markets are open (“the day”) and simply having exposure when they are closed (the “night”).
Why does the Night Effect exist?
There is no single unified reason as to why the Night Effect exists and the Night Effect is not constant, i.e. there are times when day markets outperform the night session and vice versa. Academic research has proposed multiple reasons as to why the Night Effect exists and scholars have not aligned behind one single reason for its existence. The frequently stated rationale for the Night Effect’s existence focuses on the timing of information flow/availability, risk management practices and liquidity premiums arising from differences in the trading volumes between the day and night sessions. We believe that these reasons make intuitive sense and align with how investors make trading decisions.
How do you measure the Night Effect?
We use opening and closing prices on market weighted, index based Exchange Traded Funds (ETFs) to distinguish between the day and night return and risk characteristics of various equity exposures. ETFs are used, as opposed to indexes, because they provide a daily source of both opening and closing values.
Does the Night Effect appear in both up and down markets?
Our research shows differences in risk and returns across multiple time periods in both up and down markets. We also find that the night trading session is generally less volatile than the day session and frequently declines less than the full 24 hour trading cycle in down markets.
How do you see investors using NightShares ETFs?
We see investors using NightShares ETFs to implement a range of short and long term investing strategies. Given the differentiated risk/return characteristics of ETFs that focus on just the overnight session in the equity markets, we believe that investors will use NightShares ETFs to revisit their existing asset allocation strategies as well as to implement short term trading strategies based on how markets distinctly react to information during the day and night trading sessions.
Are there other products that focus on the Night Effect?
We believe these products are unique in that they are singularly focused on capturing the Night Effect.
Will you be buying and selling all the stocks in the portfolio every day?
We will be trading every day but have no plans to buy all the stocks at their respective weights every night and sell them every morning as this would lead to a high level of transaction costs - thereby negating the value of the Night Effect. Instead, we will use a variety of financial instruments to implement our portfolio strategies, including equity index futures and/or swaps. Liquid equity index futures allow for broad equity exposure and reduce the cost of gaining exposure compared to trading individual stocks. Swaps contracts, created with well capitalized investment banks, also allow us to create a range of return streams that align with the portfolios’ objectives. Combined with institutional trading approaches, such as algorithmic trading, we are looking to use a range of financial instruments to efficiently gain exposure to the overnight portion of the market.
Are these passive or active ETFs?
NightShares ETFs are transparent active ETFs