Category: Alternative Investment Strategy

Is it worth trading two highly correlated equity indices? The correlation between the Euro STOXX 50 and 600 is generally above .95, so most would argue that the two are interchangeable. There is a significant difference in the volume of each futures contract, so liquidity may not be the same. Hence, some would argue that it is reasonable to choose one, but a closer look will show that there are spread opportunities across the two indices no different than the equity spread opportunities in the US based on size or industry mix. Spread trades in index futures offer a way to increase the opportunity set of returns in ways that are often uncorrelated with traditional directional bets.

As measured by a well-watched peer group index, the managed futures hedge fund strategy is in a significant drawdown. Despite this, money is still flowing as investors have taken a forward-looking view of what this strategy will do if there is a sell-off in major asset classes like equities. Of course, indices do not represent […]

We have heard the term “Icarus Trade” recently popping up in market discussions several times. In Greek mythology, Icarus creates wings to fly, but his overconfidence took him too close to the sun, where his wings burned, and he fell back to earth. In investment terms, the overconfidence of some investors will take them to […]

“Momentum is a big embarrassment for market efficiency,” he proclaimed, saying he “hopes it goes away” and that the concept was “not exploitable.” – Eugene Fama from CFA Society of Chicago keynote speech. “Never let the truth get in the way of a good story.”― Mark Twain. You cannot help but think about Thomas Kuhn […]

What is commodity investing all about: 1. The curves and carry – backwardation/contango (inventory). Given the cash market for commodities is often not available for investing, the primary market for investors in commodities is the futures. Consequently, the shape and dynamics of the futures curve is a dominant factor for longer-term investing. Investors cannot think […]

During a simple discussion on investing, the topic turned to biases. We have learned to talk about many biases from behavioral economics. We now have a catalog of preferences which makes them easier to mitigate. Still, there seems to be one bias that is very hard to address, and that is the overarching theme of […]

There has been tremendous talk concerning populism and politics, but for investors, the focus still must be on these movements’ economic and market impact. So discount the news headline and rhetoric and focus on the potential market impact, but a good definition of populism is necessary for building a framework to determine risks. Defining Populism […]

What has been at the vanguard of thinking in finance is the breakdown of returns into their constituent parts or risk factors. Finance has moved well beyond market beta. The first breakdown for a portfolio is not returns by asset class but returns by risk factors. Some have criticized the current situation as a factor […]

Another simple test to determine whether managed futures returns will do better than average is by looking at economic growth. We know that bonds and other defensive assets like managed futures will do better in “bad times,” such as a recession, but there are not many recessions. The cost of being defensive can be very […]

Financial conditions can inform us about periods when thises and market dislocations will occur. The graph above shows the time series for the Chicago Fed adjusted financial conditions index. The index measures liquidity, risk, leverage in money, debt, and equity markets, and traditional and shadowing banking measures. If the index is positive (negative), financial conditions […]