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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.
Evolution and Adaption: Trend-Followers are Constantly Changing
Hedge funds styles, strategies, and firms evolve over time. The behavior of a hedge fund today is not the same as yesterday. These behavior changes are not because a manager has changed his style but because the environment, the tools, the regulations, and the ideas surrounding finance are different.
Blending Risk Premia and Generating Craftsman Alpha
Alpha generation will fall when it is measured correctly through an appropriate benchmark. Alpha shrinkage over the last ten years is a measurement problem. Returns for hedge funds are a combination of the underlying risk premia styles employed and the skill of the manager.
Alpha Production – As We Get Better at Beta Measurement, Alpha Will Decline
A growing investment management theme over the last few years has been the incredible shrinking alpha. As investors gain more information on risk premia, there seems to be less alpha produced by managers. In reality, alpha production has likely not changed, but our measure of alpha has gotten more sophisticated so the skill associated with any manager seems to have declined or at least changed over the last decade. We can now tie what was previously thought of as alpha to specific risk factors. If alpha is tied to systematic risk factors, then it really is not alpha.
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.
Where Do We Stand After the October Repricing?
The losses in October are well-known. Now the question is whether these down moves will continue across styles, sectors, country indices, and bonds. The answer with few exceptions is the same. Market trends are pointed down and volatility is higher. For equity styles, short, medium and long-term trends are all pointing down. For market sectors, the only positive trend is with consumer stables, utilities, and real estate; the more defensive sectors. For country equity indices, the only strong positive standout was Brazil in reaction to their presidential election. For bonds, short-term Treasuries offer some protection, but the longer-term trends are all down.
The Capital Appreciation Program: Spreads ‐ A Unique Approach to the Energy Sector
Corporate Summary Tyche Capital Advisors, LLC is a New York based registered commodity trading advisor currently offering trading programs to qualified investors. Through its trading programs, TCA will engage in speculative trading of futures and options contracts offered on the United States commodity exchanges and overseas futures exchanges. Tariq Zahir and Steve Marino are the […]
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.
Managed Futures – No Crisis Alpha in the Short-Run
Market performance for October was sobering. Investors were complacent to volatility and the fact that markets correct. The speed of adjustment hurt the average managed futures manager who was not able to get out of markets, which repriced at the beginning of the month. Although the month ended with some improvement from return lows, there is little to celebrate.
The Price of the Fed Not Providing New Liquidity – Larger Drawdowns
Our graph looks at the drawdowns for the equity benchmark SPY over the last ten years. While the current drawdown has come fast, there are have been a number of drawdowns that have been far worse albeit none that have reached the magic 20 percent market correction level. There is reason to be concerned, but investors need to have perspective.
Looking For Risk In All The Wrong Places….
…was lookin’ for risk in all the wrong places, Lookin’ for risk in too many faces, searchin’ their eyes and lookin’ for traces of what I’m dreamin’ of. -Lookin’ for Love, Johnny Lee Risk will surprise you. It is supposed to do this. While we always think of volatility as risk, the real measure of risk […]