Category: Alternative Investment Strategy
Alternative risk premia overreaction in 2018 – Don’t fall for recency bias
What happened to alternative risk premia returns in 2018? This was a major discussion topic at a UBS risk premia conference last week. It was a difficult year. In fact, it was the worst performance year since 2008, and the decline for many strategies was a multiple standard deviation event. Yet, there is a good opportunity for investors who focus on the longer-run. Since the performance for many risk premia seemed unrelated to macro factors, there is strong potential for mean reversion to longer-term strong positive performance. To extrapolate recent performance as representative of history would be to fall into a recency bias.
Risk premia performance generally positive for January
It is a new year and the underperformance of many alternative risk premia strategies in 2018 is now an old memory. Good performance heals past return wounds. While well-constructed alternative risk premia should not be highly correlated to market beta, they will be related to the investment regime. Risk premia are time varying.
A risk-on environment and the hedge fund world is good
Hedge fund styles as measured by the HFR indices showed strong positive January performance in tandem with the gains in the stock market. When in a risk-on environment many hedge fund styles are winners.
Risk-on- What happened to fears of 2018?
The equity reversal was tough on many trend-followers. This reversal spilled-over to US bonds during the month. Good buy trend signals now in both equities and bonds. Dollar strength reversed on Fed pause remarks. Metals and energy both moved higher during the month even with global growth threats. Commodities asset class is not a trend rich environment at this time.
Global stocks – All about avoiding global slowdowns and recessions
Is it that simple? Global equity investing is all about missing the big macro risks – recessions. There are headline risks every year, but it is always about economic growth when you step-back and look at annual performance. If global growth appreciably slows, global stocks are hurt. A simple long-only asset allocation strategy is to stick with long-term trends with the ability to walk-away when a recession or slowdown occurs.
Global Financial Cycle – Look for the risk regimes
A recurring theme for our forecasting model is not predicting the future but just identifying the current regime. It is more important to first know where you are before you determine where you might be going. If you have ever been lost, the best solution is to first figure out your current location.
Dollar smile – We are moving to the smile bottom
A good simple approach for framing the longer-term movements in the dollar is through using the narrative of a dollar smile. We have written about this years ago, but think it is relevant today. The dollar smile, first popularized by Stephen Jen, says that currency behavior is driven by two competing regimes. Regime 1 is […]
Concentration, inequality and the status quo – Size matters but not always for the better
A capitalist system is not always competitive environment, but competitive environment is a capitalist system. One key macro issue that is not often discussed is the increasing concentration of businesses in the US and other capitalist countries. While not monopolies, an increasing amount of market share is in the hands of fewer companies and form oligopolies.
Momentum is still a viable strategy – Look at the numbers
There has been a lot of discussion on the lack of success with momentum and trend-following strategies. There is little doubt that there has been greater dispersion in returns across managers. There have been winners and losers with disappointment focused on some larger high profile firms.
Strategies for Assessing ’40 Act Alternative Investment Funds
With the increase in ’40 Act alternative investment fund offerings, there is greater interest in how to use these funds to help diversify portfolio risks effectively. There are a number of classification schemes that often overlap with some traditional mutual fund categories. Hence, there is an issue of how to best classify the set of […]
What will be the cause of the next recession?
There has been increased market talk about the next recession. Many are predicting it will occur this year albeit the dispersion of views is wide. To do a proper assessment for the cause of the next recession investors should go back to the causes of past recessions. This one will be different, but we should assume there will be common features with the past.
Recession probabilities – There is no consensus
What is the chance of a recession this year? Many have tried to build systematic models to give a probability number. This has been a good advancement in thinking about macro forecasting, but the variability of forecast is unusually wide. Different inputs will give different probabilities and there is no consensus on what should be the right inputs.
Where are institutional investors going to put their money? Not what you think
It was a tough year for money managers. All asset classes underperformed cash and most were negative for the year. Equities were a return disaster for December. Hedge funds did not do well for the year. So what will investors do?