Risk Update – June 2019

It is that magical time of year again – the BIS Annual Economic Report is out! As always, it is full of insightful commentary and great charts. Well worth digging through. https://www.bis.org/publ/arpdf/ar2019e.pdf This latest report, inevitably, touches on what is a very common theme at present; to what extent has Central Bank policy run its course? As we like to say the “we did ten years of extreme monetary accommodation and all we got was this T-shirt” complaint. If the objective of ZIRP, NIRP, QE, QQE, Twist, YCC, MLF, LSAP, LTRO etc was to elevate asset prices, then it has…

Risk Update – May 2019

Many of you volatility disciples may be familiar with a presentation given by Mike Edelson, CRO of the University of Chicago Endowment, at various venues over time, eg the Global Volatility Summit. There is even a link you can access at the website: Below we have created a similar, though hypothetical, version of the chart at the core of his presentation. This chart is a simple scattergram where the x-axis represents the annual performance of the SPX index and the y-axis represents the returns of a hypothetical portfolio. The blue dots form a linear line representing a targeted return of…

Risk Update – April 2019

The month of April saw more of the same 2019 theme – risk on, asset markets strong, and, maybe most particularly, volatility down. Across a range of asset classes and geographies we saw a continued push lower in volatility pricing, with markets accepting, and even pricing in, ongoing central bank policy accommodation always at the ready in case of weakness in equity markets; the search for yield persists in all its forms. You name it – levered, structured, securitized, risk premia, vol selling – and the investment world is piling back into it. In our little corner of the investment…

Risk Update – March 2019

A very good way to understand what it is that we do, or at least try to do, is to make an analogy to what, in the world of mathematics, is known as the St Petersburg Paradox. The gist of the paradox is a game where a fair coin is tossed and the player wins two dollars if heads comes up, and the amount of winnings doubles if heads come up in successive tosses. At any point that tails comes up the game is over and the player gets his accumulated payout. Simple math shows that the player has a…