Archives
Monetary regime change – A crisis catalyst is needed
Reviewing the first quarter financial performance, the dominant macro theme was the change in Fed policy actions. The same could be said about the EU—no rate increase and no solid trend for normalization. The new macro focus is on the choice of Fed governors. More important than any policy comments or change in Fed governors […]
The Fed’s Independence: History, Current Issues, and Implications for Financial Markets
Is the Fed independent? Should it be independent? Has independence been an important topic in the past? More specifically, should new Fed governors be biased to economic growth, consistent with current fiscal policies over expected inflation, focus on price stability? The current discussion associated with new Fed governors is nothing new. The Fed has always fought for as much independent as possible, yet the Fed is a creature of Congress.
Maximizing Investment Success: A Guide to Developing and Weighing Multiple Options
Paul Nutt, a leading decision-making researcher – Only 15% of the case studies saw decision-makers actively seek out new options than what was available at the outset. Only 29% of organizational decisions contemplated more than one alternative. (From Farsighted by Steve Johnson) There is more to decision-making than “whether or not”. Too often, decision-making is bereft of choices. Everything […]
Strong first quarter returns for selected alternative risk premia
Selected alternative risk premia showed strong performance during the first quarter. There is significant tracking error with the HFR risk premium indices versus individual bank risk premia swaps, but they can provide some suggestive rankings. This strong performance should not be surprising given the large reversal of with equity beta and the strong moves in global bond markets. A couple of major themes emerged for the first quarter centered around positive equity beta risk and falling volatility.
Explaining Hedge Fund Performance: Market Risk vs. Style Performance
Hedge fund performance was dominated by the exposure to market risk as those fundamental equity funds that held more market risk dominated style performance. However, the average returns mask the large dispersion across styles. We still use indices for analysis because it does provide some information on what the average investor may expect. For example, while CTAs were down, on average, for the first quarter, anecdotal evidence from managers sending me reports show some up in the double digits for the first quarter. Winners made big money in the last quarter.
Why Trend-Following and Automated Systems are No Longer Enough in the CTA Space
The CTA space has struggled mightily over the past 10 years. We believe a CTA manager with a proprietary trading skill set, proven over time throughout various market regimes, is the necessary future of the industry. Trading proprietary firm capital under an SMA structure can have multiple benefits. This way, firms do not have the overhead and headache of bringing on a new trading team. Both parties are free to focus on what they do best; trading and managing risk.
Equity Factor performance in 2019 – Clustering of Returns
An analysis of the first quarter tells us a lot abut factor investing in the short-run. Foremost, the worst factors last year are the best for this year. Factor risks change with the market environment as shown through the global factor indices from S&P Dow Jones. Factor rotation occurs, but not clear that it is predictable. Factors effects also can be swamped by the impact of large macro events.
March – The big rotation from stocks to bonds
March was about asset class rotation from equity to bond demand with fixed income significantly out performing equities in March. Markets have moved from the January monetary euphoria to something more cautious and questioning. If the Fed potentially put all rate rises on hold for 2019 and the ECB is delaying a course on normalization, do they know something I don’t know?
Surviving Market Turbulence: Why Yesterday’s Logic Won’t Cut It
Market turbulence just does not happen. There is a catalyst, and the catalyst is a surprise turn of events. Now there are investment surprises everyday, the difference between expectations and realized results. A surprise creating market turbulence is more than just a micro surprise associated with a company but is a signal of a macro regime change.
Bill Gross’ Alpha: How He Generated High Returns in Fixed Income Through Sector Risk Premium Allocation
Bill Gross has retired and there already has been research to see if he was the Warren Buffet of bonds. His fixed income track record over the long-run cannot be easily be matched, but a careful study of his portfolio suggests that his gains were generated differently than the classic stock-picker. He may have generated alpha but he did it the old fashioned way in fixed income, he took on more sector risk. See “Bill Gross’ Alpha: The King Versus the Oracle” by Richard Dewey and Aaron Brown.
Unveiling the BAIT Strategy: The Art of Trading with Advantage
You are so intelligent. You have a great trade idea and know it will be a winner, but there is only one small problem. For any trade you make, there must be someone else on the other side. For every buyer, there has to be a seller. So, for what you are doing right, someone […]
The fallacy of extrapolation – A deficiency of forecast imagination
One of the great problems with forecasting is the fallacy of extrapolation. Forecasters love to believe that tomorrow will be like to today and head in the same direction. Whatever is the trend today will continue tomorrow to the exclusion of other alternatives. There is over-extrapolation.
Alan Krueger and the Tough Problem of Happiness
Everyone who has taken a course in economics is aware of utility theory and the desire to have more “utils”. Those with a historical focus will recall the deep discussions of early 19th century economist, “utilitarians” and the dismal science. The concept of measuring and auditing happiness has resurged in economic research, but it has been a perplexing problem. The basic idea with both economics and finance is that money can buy you happiness, but the reality is more complex.