Each asset class is special but have some defining characteristics that make them an asset class. Each also has dispersion in returns within the members in the classification. Commodities are an asset class with a very diverse collection of members which may give very conflicting macro/micro signals.
We spend a great deal of time studying history, which, let’s face it, is mostly the history of stupidity.”
-Stephen Hawking
“We learn from history that we learn nothing from history.”
-George Bernard Shaw
I don’t want to sound pessimistic, but it cannot be helped when reviewing what lessons have been learned since the Financial Crisis. It has been a decade since the Financial Crisis; however, some of the same problems that led to the crisis seems to still exist. Yes, there are differences; subprime loans, mortgage excesses, and bank leverage will not be the problems. Some of the structures have changed and our knowledge of financial channel dynamics on the real economy has improved, but the meta-issues of credit, leverage, and liquidity still seem to exist with limited solutions and discussions.
Global markets has been focused on trade, trade wars, and tariffs. News has been dominated by discussions on trade and less often about dollar currency changes and capital flows, yet capital flows often dominate trade. An increasing dollar is supposed to be emerging market positive through the trade channel, but in reality, a dollar appreciation will increase financial risks and impact EM investments.
With all of the discussion on news, “fake news”, misinformation, and opinion, it is important to focus on some first principles for investing and narrative as news. The narrative is not the facts from an announcement, but the story surrounding the price move coupled with facts. For any investor, it is important to realize that narrative generally follows prices, and prices do not follow narrative.
Short-term interest rates are now above dividend yields for the first time since the Financial Crisis. This could be a big deal. Investors can now hold short-term bonds and receive a higher carry return than holding dividend-paying stocks. The cost of holding cash is now less than holding dividend stocks.
There are now hundreds of alternative risk premia that are available from banks. This is a business outgrowth of the alternative risk premia work that has been done by academics. Yet, it is difficult to argue that there is any one return or risk profit that can describe the performance of risk premia. There are structural risk premiums which may not vary much over time and as well as risk premia that are cyclical in nature and be related to macro economic factors.
One of the core issues with alternative risk premia is not just determining whether they exist but how they will move through time. If alternative risk premia are time varying and associated with specific macro factors, it may be possible to tilt exposures based on current or future market conditions or avoid carry risk premia during those periods when expected returns will be lower.
If you have been on the road looking for cheap food 24 hours a day in the South, you have likely been to Waffle House. It is not the best breakfast, but it is a good place for a quick meal. You usually will not see a money manager or a Wall Street banker at […]
Investments in alternative risk premia (ARP) are way to access the important building blocks for returns and generate return streams that will not be highly correlated with market beta exposures. Through factors and styles like value, carry, momentum, and volatility, investors can generate unique return streams relative to asset class betas. To show the value of alternative risk premia, we have taken a broad based index constructed from HFR through bank swap products and compared against a standard 60/40 stock/bond index. The HFR index is new and represents only a portion of the growing ARP market and may not include the largest banks. Still, it may provide some insight on what realistic value can be added through investing in a portfolio of risk premia.
How many times have you gone to a pension fund or endowment and heard the phrase, “You will have to check with my consultant”, or “If my consultant hasn’t approved you, I will not invest”. Pension consultants are powerful in the money management industry. Without their blessing, it is hard to grow an institutional money management business. There is the assumption by many that they have special investment powers that allow them to conduct due diligence and ferret information on managers that cannot be achieved my most others.
Whether, large-caps, small-caps, growth or value as measured by the major stock index benchmarks, US stocks markets are having a good year, but you would not know it if you saw August or year-to-date hedge fund style performance. Many hedge fund managers seem to have missed the big equity moves and not generated alpha. We find this especially odd since market dispersion and correlation numbers within indices show that there should have been a significant number of unique opportunities as measured by S&P Dow Jones Indices.
The 1990’s were filled with emerging market failures through “sudden stops” – a sharp reversal of capital flows which led to declines in currencies, large increases in local interest rates, and sharp declines in equity market. Countries hit a funding wall.
Managed futures showed good returns for August with gains in both stock indices and bonds. Given size and liquidity, as equity and global bonds goes, so goes CTA performance; however, there were also gains in selling grain markets and taking advantage of shorter-term trends in the energy sector. Other CTA indices like the BTOP50 also showed strong gains for August and similar year to date numbers at -2.66 percent. The SG alternative risk premia was down slightly for the month.