Risk Update – January 2020

Our friends from the CME sent us this nice paper recently. https://www.cmegroup.com/education/alternative-investment-resource-center/research/alternative-investments-belong-pension-fund-portfolios.html Simply put, it is an analysis on the longer term portfolio benefits of diversifying strategies, in this case looking at replacing a portion of a traditional 60/40 portfolio with a Commodity Trading Advisor (CTA). As you are all aware, we love this type of analysis, so we thought we would see how it would look against our preferred (true) diversifier – Long Vol. The main chart from the paper compares Funding Ratios of a 60/40 portfolio against the authors hypothetical portfolio where they replace 6% of the Equity…

Risk Update – December 2019

A certain dichotomy has come to our attention. The whole ream of senior, past and present, central banking elites kicked off the New Year with a stream of comments about the past successes and the future challenges of monetary policy. We’ve copied in a few of their quality quotes here, but would also highly recommend that you take the time to read, in particular, Mr Bernanke’s speech/paper: https://www.brookings.edu/wp-content/uploads/2019/12/Bernanke_ASSA_lecture.pdf https://www.brookings.edu/blog/ben-bernanke/2020/01/04/the-new-tools-of-monetary-policy/ The gist is, everything they did to save the world post GFC worked. None of the nasty side-effects came to fruition, with “the possible exception of risks to financial stability”. Further,…

Risk Update – November 2019

We suspect most of you have heard quite a lot lately about something along the lines of “monetary policy is running out of its potency, so it is time for the fiscal side to step up”. We certainly have. The, deemed obvious, solutions run the gambit of traditional fiscal stimulus, to helicopter money, to something called Modern Monetary Theory (MMT), but in the end it all amounts to more or less the same thing: somehow additional government spending, whether financed by debt or otherwise, will set economies on their elusive sustainable paths. We found the linked piece below from Beijing…

Risk Update – October 2019

As any regular readers will know, we are passionate about what we do and, along the way, hope we can also change how people think about fiduciary management of other people’s money. It sounds relatively straightforward, but there are multiple things that add up to one overriding problem, what we would call “bad convexity”. Most often we distil that to what we see as a simple truth; fix your convexity – change your life. We have previously shown the below hypothetical return profile, and the impact that such concavity has on long term geometrically compounded returns. The impairment to terminal…

Risk Update – September 2019

Ever lower interest rates is the answer. Nobody seems to know, or care, what the question is. Both the Federal Reserve and the ECB dialled up their monetary easing in the month of September with rate cuts and renewed balance sheet expansion, with seemingly little concern for the success of such policies to this point. Whatever it is / was that they hoped to achieve from years of unprecedented monetary extremes, they apparently have yet to achieve it. Their only answer is simply more of the same. We have discussed before the concept of the “Reversal Rate”. The concept that…

Risk Update – August 2019

With ever greater extremes in global monetary policy, what some might call currency debasement wars, and the resulting unprecedented historical lows in interest rates the world over, it is tempting to write a piece on the structural damage that is being done to society: the pulling at the thread of socio-political stability as wealth segregation reaches breaking points in country after country. Instead, however, we will go back to our bread and butter, and pull together some of our past work on portfolio strategy and expound further the ever-increasing benefits of strong risk mitigation, and the ongoing supremacy of “barbell”…

Risk Update – July 2019

As widely anticipated, the Federal Reserve cut the Fed Funds rate by 25bp on July 31st. In the official statement they claimed that they did so “in light of the implications of global developments for the economic outlook as well as muted inflation pressures”. The Fed also announced that they would cease the balance sheet reduction exercise immediately, two months earlier than previously targeted. Hard not to come back to what we quipped last month – “ten years of extraordinary monetary accommodation and all we got was this T-shirt”. By some accounts, we are now in the longest US economic…

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…