Category: Alternative Investment Strategy
Fixed Income Choices – Move To Further Underweight
Current views on asset allocation in fixed income and credit are generally negative. The focus should be on holding shorter duration and cash investments.
Spread Widening Can Be Costly – All Is Not Well In Credit Land
It does not take much for an investor to have a losing credit trade on long duration bonds. The average duration on a long-term 10-year corporate is around 8 and current OAS spreads for triple-B corporates are 160 over Treasuries up from 120 earlier in the year. Half this move will take investors back to levels seen in 2016 and wipeout all of the spread compensation for a year. This is not an extreme bet if we have any further erosion of equity prices or change in credit risk expectations, (See Corporate debt growth has exploded – The added macro shock sensitivity creates real risks.) Shorter duration corporates will be at less risk given their lower duration but the stocking up of credit for yield reaching can be painful if credit risks increase.
No Diversification in Mudville – Time To Try Different Risk Premia Styles
Diversification is usually thought of as a longer-term concept. Don’t worry if it seems like you are not receiving diversification in a given month or quarter. Think about diversification across a longer horizon. Diversification also does not guarantee better returns for a portfolio. Negative diversification does mean that your losers will be offset with winners.
25 Years after Jegadeesh and Titman – The Momentum Revolution
Trend-following and momentum has always been an important part of hedge funds and alternative investing but it would be hard to say that trend-following was mainstream thinking prior to the early 90’s. This was the high water period of the market efficiency, but that thinking started to take a major change with the “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency”, published in the leading Journal of Finance. There were other papers that discussed similar topics and the behavioral finance paradigm shift had already begun, but this was the one paper that many academics started to quote with increasing frequency about momentum effects.
The October Repricing Causes Low Signal to Noise, Limited Trends
When markets reprice risk, it is not fun being a trend-follower. Long equity indices were a crowded trade and few made money when the early October reversal hit the markets. Fast traders were able to exploit the move, but a bounce off the lows hurt intermediate traders. Bonds were hit with the cross-currents of flight to safety against the continued threat of growth and Fed action. Currencies were hit with this repricing and not a place of profit able trends.
Mixed Signal from a Fed Official – A Modernized Taylor Rule Says Stop
Simple assumptions to some classic monetary models will produce very different policy views for the direction of Fed action. These significant policy divergences are the reason for the recent pick-up in bond trading. A dispersion of opinions on Fed action will lead to more volatility, trading, and potential rewards in these markets.
Managed Futures: Portfolio Diversification Opportunities
WHAT ARE MANAGED FUTURES? The term managed futures describes a diverse subset of active hedge fund strategies that trade liquid, transparent, centrally-cleared exchange-traded products, and deep interbank foreign exchange markets. Managers in this sector are called commodity trading advisors (CTAs) and their strategies are largely focused on financial futures markets with additional allocations to energy, […]
Narrative and Price – Know the Line of Causality
With all of the discussion on news, “fake news”, misinformation, and opinion, it is important to focus on some first principles for investing and narrative as news. The narrative is not the facts from an announcement, but the story surrounding the price move coupled with facts. For any investor, it is important to realize that narrative generally follows prices, and prices do not follow narrative.
What Money Managers Can Learn from Waffle House
If you have been on the road looking for cheap food 24 hours a day in the South, you have likely been to Waffle House. It is not the best breakfast, but it is a good place for a quick meal. You usually will not see a money manager or a Wall Street banker at […]
Judgment and Experience – A Recipe for Success for Any Strategy
Each situation requires a balancing derived from judgment and arising from experience, skills acquired by learning from the past and training for the future.
Understanding the Role of Inflation Beta in Commodity Investing
There is a correlation between commodity investing and inflation. Commodities do well late in the business cycle when bonds usually underperform, and inflation is heightened. Research work by PIMCO measures the inflation beta for some significant asset classes. Stocks have a negative inflation beta even though earnings should rise with inflation. Bonds as nominal assets […]
Focus on the Dislocations – These are the Places of Market Opportunity this Week
There are some recurring themes this week in our highlighted charts, debt and leverage will overhang any global economic discussion; however, we see some interesting dislocations that can offer global macro opportunities:
Managed Futures Hurt by Bond Reversals – Surprises Hurt Major Trend-Followers
Managed futures performance for May was driven by one sector, global bonds. The surprise events in Italian politics led to a flight to quality move into safe bonds around the world. This sharp reversal caught most short trend-follower flat-footed. The commitment of traders reports have shown a strong short tilt in managed money. The size of the move over less than 10 trading-days ensured stops would be hit and positions changed. The question was just how much pain managers took in this sector. Notably, the markets sold-off on the good economic employments numbers to further hurt managers who switched to longs earlier in the week. A similar set of events followed the rates markets. Expectations for fewer Fed hikes given the political turmoil only reversed again after the US employment number.