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Hedge fund returns are a combination of alpha and beta risk exposure. The betas across different hedge fund styles are variable and dynamic. In general, beta will be below one, with most hedge funds showing market betas between .3 and .6. Some hedge fund styles, like managed futures, may be lower. Alpha can also be […]

Tail events will often lead to over-reaction as seen in the market action overnight. The worth of a manager is not measured by his ability to build and adjust portfolios in calm times but his ability to navigate and manage through uncertainty.

Navigating uncertainty is not always taking action but at times learning to do nothing. Discussion with managers suggests that some systematic managers did not take model signals last night. Markets moves out of proportion to the discounted futures cash flows signaled that no action was best.

Managing uncertainty starts with core portfolio construction. Extra diversification is necessary when there is extra risk. Diversification may come through differences in timeframe and styles when correlations across asset classes have the likelihood of moving to one. Managers are paid to build portfolios, manage risk, and take action on changes in economic fundamentals, this cannot generally be done with passive investing.

October was a painful month for investors with no place to hide in many sectors, styles, countries, or bonds. Major equity styles declined significantly especially in small caps.

Each month we run a set of trend models against the major markets in each asset class sector. We then average the trend direction, either up or down, to generate a sector signal.

Managed futures should not be synonymous with trend following but most of the major indices that track this hedge fund style have a high proportion of trend-followers.

The behavioral finance revolution has added immensely to our knowledge on the aberrations from efficient markets and rational expectations. Mistakes happen because we are sloppy thinkers.

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:

Skew can be an important component of returns. Obviously, investors would like to avoid negative skew, but if an asset with a positive skewed return distribution can be found, it can potentially generate a nice upside stretch with performance. Still, skew is sensitive to outliers and hard to measure. Skew is often generated from mixed distributions; nevertheless, if you can find positive skew investments and can associate this property with specific factors, portfolios can be structured to generate some extra upside return potential by increasing allocations to these assets.

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.