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Since the post Brexit plunge in bond yields, we have been becoming more negative on bonds. Along with virtually everyone, except central bankers, we have been banging the drum of how insane negative bond yields are. However, with many institutional investors required to hold Government bonds due to regulatory and capital requirements, and central bank’s QE exceeding global Government bond supply, it was almost understandable how bond yields could remain in sub-zero terrain. Understandable yes, but that did not make them good investments!

The list of cognitive biases that can affect investors keeps growing. An explosion of studies show that observed decision-making under real and test conditions is hard. Just look at the wheel from Buster Bensen’s cognitive bias cheat sheet, the single best graphic I have seen which lists and categorizes the cognitive biases investors face, to get a flavor of the problem. Nevertheless, this work does a good job of reducing all of these biases into four problem categories:

There is no doubt that big swings in the value of the US Dollar have a big impact on global economic growth and also financial markets performances. Between June 2014 and January 2016, as the Dollar rose by over 20%, global equity markets struggled (Emerging Markets suffering the most), commodity prices plunged and deflationary concerns moved front and center. After the Dollar topped in late January, everything has turned around. The Dollar has traded sideways, financial markets have performed pretty well overall and economic concerns have abated. Although it cannot all be about the Dollar, we need to recognize that the Dollar is extremely important for both financial markets and the global economy.

Investment consultants are a force to the reckoned with in the pension world. They advise and drive many pension decisions around the globe.

The modern financial world could not exist without effective central banking. The foundation of this core invention is a trust in banking; a trust that a paper claim can be used as a medium of exchange and a store of value…

I finished reading The End of Alchemy: Banking, the Global Economy and the Future of Money and came away with some useful but simple insights on the current state of finance by the author Melvyn King.

All hedge fund strategies are not created equal. Correct hedge fund classification is important. Poor classification will generate false conclusions on the skill of the manager and may deliver return streams that are unexpected. Asset allocation becomes more difficult if classification is ineffective.

September came and went with a relative whimper. It was our view that various key macro events scheduled throughout the month coupled with uncertainty over monetary policy, had the potential to produce significant moves across global markets. As it turned out..with the exception of the commodities sector…this was not the case. U.S. equities ended the […]

Risk parity has been one of the most important advancements in portfolio construction over the last decade. It places the focus on equalization of risk and not on comparing expected returns which are notorious for being difficult to forecast. However, there is a problem with risk parity. It will allocate more to low risk asset classes that may be subject to a downturn. There is no opinion on market direction or valuation. It assumes the investor has no information on individual assets or view of factor risks. Outperformance relative to cap weighted portfolio is related to whether low risk assets have returns than higher risk assets.

International finance has been increasingly confusing for academics, policy-makers, and traders. Just when you think currency markets will be well-behaved and follow theory, they will move in ways that are totally unexpected. We have always known that currencies are hard to predict given they are expectational markets. Even with perfect foresight about underlying fundamentals, our ability to explain currency is suspect. The research continues to show that currencies are hard to predict and fundamental models can only explain a small percentage of the price variation. There needs to be a deeper framework for understanding foreign exchange behavior.

The Financial Crisis resurrected the thinking of Hyman Minsky and his “financial instability hypothesis”. With the crisis, there was coined the term Minsky Moment, the time when financial markets collapse after a period of prosperity from the excessive speculation on financial assets. Unfortunately, his insightful views on financial instability never received the attention it deserved before the crisis. It was not structured in the current economic orthodoxy of formal mathematical modeling.

Big historical events, especially tragedies, are committed to memory so we will not forget, yet is it really good to remember everything? Put differently, is forgetfulness useful? Would we be better off if some memories disappeared?