Tag Archives: alternative investments

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I'm a sucker for a good venn diagram, so when I saw one on the New York Times Bucks blog featuring the intersection of "Rich Smart People" "Super Secret Formulas" and "Costs You a Lot of Money" I had to learn more.  What's in the intersection of Carl Richards diagram? Hedge Funds, that's what.  The post's title? "The Appeal of Investments That Cost More and Return Less"

I'm not here to dump on hedge funds - I'm sure there are plenty of folks out there who can do that - but what is this weird attraction to opacity?  Why do some people like alternative investments with mystery ingredients?  Do these people also buy food without reading the ingredients? Nobody likes mystery ingredients in food, right?

Richards thinks it's a persistent bit of "(bogus) investing folklore" that "the more complicated and secretive and exclusive it is, the better." Sure, if the secret to great returns at low risk wasn't a secret, everybody could enjoy them, and that's clearly not the case.  The folklore persists, but just because you can't do it - maybe you don't have the time to run models and keep up with markets and manage trades - that doesn't mean you don't have a right to know about how it works and what's in it.

You know Currensee is all about transparency, so here's our advice to smart rich people, and it also goes for anybody with money to invest: ask to see what's inside and how it works; if they won't tell you, be very very careful.  Investors in stocks hold the boards and executives accountable and demand annual reports and audited financials, so should people who hold alternative investments and managed funds.

The whole area of alternative investments is a major talking point in both academia and the industry these days. Not that this is something new, of course. There has always been some kind of alternative investing going on. For many years it was the commodity market which was the main focus, often through Commodity Trading Advisors (CTAs) – though that is rather a catch-all category for what today would just as likely be considered hedge funds as in many cases similar trading strategies are employed. Today alternative investing has expanded to include a great many different areas of investing, to include the currency market, and commodities have remained a focal point thanks to the growth of ETFs.

The fun part of being a PhD student is that you pick up all kinds of interesting information through your research, attending conferences, and sitting in on seminars. This week I’ve been in a workshop put on by a visiting faculty member, part of which focused on alternative investing, with a specific concentration on commodities. Naturally, he told us all about various research into the subject matter, and included a significant bit of his own.

Here’s the unexpected conclusion he presented to us. Despite the fact that commodities have been hyped for years as providing diversification for investors who otherwise play stocks and bonds, the evidence doesn’t support the case – at least when looking at them in aggregate (as we would with a commodity index or ETF). This is especially understandable in recent times given how commodities have become much more correlated with stocks and bonds of late, at least partly thanks to the increased use of commodities in asset allocation (decisions which drive the choice to invest in financial assets correspond to those to invest in hard assets).

The one exception to this discovery is gold. The research supports the idea that diversification into gold is actually worthwhile. No doubt there are many gold bugs out there saying that was obvious all the time.

By the way, one of the major selling points in investing in commodities is the rates of return of commodity indices like the GSCI. These indices, however, have a built-in upside bias based on the way they are constructed. In other words, they don’t really tell the full story about what commodities are doing, but they are great for selling a good story to drive investment.

So, if the commodity market isn’t so great for alternative investment, is it time to look for an alternative alternative?

A Porter Cluster is not just a bunch of beers, it's when in industry or a kind of business gains traction in a particular place and seemingly competitive businesses thrive side-by-side due to the concentration of talent, investment capital, customers, and just the sheer entrepreneurial buzz of all that innovation in one place.  It's pretty exciting, and even more exciting, the Boston Business Journal just declared a cluster for alternative investing right here in Boston, and Currensee is right in the middle of it.

In the February 22-28 edition of the Boston Business Journal, Kyle Alspach writes,

A number of Boston-based tech startups are working to provide easier access to two niche areas of investing — foreign-exchange trading and quantitative stock trading — that have gained a higher profile in recent years.

The startups say they are capitalizing on interest from investors who’d like to reap more benefits from those alternative investments, but may not want to devote their lives to becoming experts themselves.

Alspach interviewed our own CEO Dave Lemont, and also checked in with Quantopian, a quantitative trading startup, and BuysideFX, a currency management system.  As the article says, investors are looking for viable alternatives and ways to invest smarter and more efficiently. Here's to more investing innovation in Boston!

UPDATE: Just as I finished writing this, we're in another BBJ article that includes nine financial startups in Boston!

 

Stock prices have been held back for at least the last two years, as the continued turbulence in the euro-zone – alongside the stop/go nature of America’s recovery from the ‘Great Recession’ – has weighed heavily on investor sentiment.

The bulls argue that the incessant focus on the well-known macroeconomic travails in both Europe and the US has seen investors ignore the stellar improvement in the corporate sector’s fundamentals since the profits cycle reached its nadir more than three years ago; the positive spin contends that the virtual sideways movement in the major stock market averages since the spring of 2010 has pushed equity valuations to the most attractive levels in more than a generation.  Is the optimism justified?

It is beyond dispute that the corporate sector’s recovery from the ‘Great Recession’ has been nothing short of impressive.  After-tax corporate profits, as reported by the Bureau of Economic Analysis, dropped by more than a third between the autumn of 2006 and the winter of 2008 – the steepest decline since quarterly data was first collected in 1947, and almost double the average of the previous ten contractions.

Record earnings seemed a long way off as stock prices plummeted towards their crisis lows during the spring of 2009, but somewhat surprisingly to say the least, corporate profits recovered their pre-recession peak by the end of the very same year.  The robust uptrend was sustained in subsequent quarters, and return on net worth reached the highest level since the late-1990s in recent times, while the corporate sector captured a record share of GDP.

The bulls’ frustration with the stock market’s refusal to move higher seems justified in light of the headline numbers concerning trends in corporate profitability.  However, a more probing analysis demonstrates that there are valid reasons behind investors’ unwillingness to attach a higher multiple to current earnings.

S&P earnings data reveals that cost-containment and the accompanying margin improvement accounts for almost three-quarters of the cumulative increase in per-share profits over the last three years, with top-line growth accounting for the remainder.  The relatively minor contribution from revenue gains has seen per-share sales fail to exceed their pre-recession peak.

By way of comparison, profit gains during the previous earnings expansion that extended from the end of 2001 to the summer of 2007, were shared relatively evenly between margin improvement and revenue growth.  Further, the quarterly year-on-year growth in sales-per-share averaged almost four per cent back then, as against just two per cent today.

It is important to appreciate that the magnitude of the economic downturn that accompanied the global financial crisis saw the corporate sector trim their cost structures to the bone.  Troubling, the subsequent lukewarm recovery has seen little let-up in this regard, and though this may well have pushed both corporate profits and cash flow generation to all-time highs, but the reluctance to reinvest the gains in either human capital or productive assets has created a negative feedback loop that threatens not only to hold economic growth below trend, but also to lower the economy’s potential future growth rate.

It is fair to say that the ‘Great Recession’ sparked serious erosion in labour’s bargaining power that is likely to persist for the indefinite future.  The unemployment rate surged to a peak of ten per cent in the autumn of 2009, as the corporate sector responded forcefully to reverse the sharp drop in profitability.  However, the high rate of joblessness combined with unsustainable household debt levels to virtually assure nothing more than a modest rebound in final demand, which in turn, has led to a relatively jobless recovery.

Subdued job growth has seen the unemployment rate persist above eight per cent for more than forty months, and the downward pressure on real wages has seen the labour share of GDP drop to the lowest levels on record.  The stagnation in household incomes means that final demand is sure to remain lacklustre, which in turn, means the unemployment rate will remain elevated.  All told, high rates of long-term unemployment and the resulting erosion of human capital could well result in a loss of productivity and lower potential future growth.

The economic downturn had a pronounced negative effect not only on the labour market, but also on net new investment in the productive capital stock.  Business investment dropped by than a fifth through the downturn, and though corporate cash flows have surged to the highest level on record, capital expenditures remain below their pre-recession peak, and have not recovered to their long-term average relative to GDP.

The current high return on corporate assets alongside historically low interest rates has not proved sufficient to generate a robust investment cycle, as high levels of macroeconomic uncertainty have kept most companies on the sidelines.  In a nutshell, the relatively low investment rate could well lead to a decline in labour productivity with a corresponding fall in the economy’s sustainable growth rate.

The upturn in corporate profitability in recent years is undoubtedly impressive, but persistently high unemployment alongside a relatively low investment rate means that the economy’s sustainable long-term growth rate is in jeopardy.  Investors are right to attach a low multiple to current earnings.

 

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

What better way to kick off the new month than with an awkward tech belly flop right in the middle of the New York Stock Exchange hustle and bustle? I really can’t seem to think of one.

Bright and early on the morning of August 1st, Knight Capital, one of the few select members of designated market makers (DMMs) for the NYSE, experienced some “technical difficulties.” Now everyone knows that when this stigmatic term is spouted off in any situation, it’s generally never a good sign – especially when it comes to a DMM for approximately 675 securities being traded on the NYSE.

In an end-of-the-trading-day recap released by MarketWatch, it was reported that Knights technological issues were allegedly causing erroneous trades to be placed on about 140 different securities, some of which were stalwarts on the equities front.

NYSE employees caught their first suspicious whiff of volatility at around 9:30 AM, which provoked both human interventions, as well as automated stop losses called “circuit breakers,” to be triggered. Though the Knight Capital tech spasms did manage some damage during their 45-minute stint, luckily no malfunction contagion escaped beyond the company’s market making unit.

The traditional image of utter chaos ensuing on the NYSE trading floor represents something different than we’re seeing now: actual humans matching buy and sell orders. Today, those orders are primarily all being executed electronically, which unfortunately leaves them susceptible to programming glitches. The repercussions from this don’t materialize so much in the tangible losses investors have suffered, but rather, in the toll they’re taking on investor confidence. After witnessing the Dow flash crash of ’10, the glitches devastating the BATS Global Markets and Facebook IPOs, and now, this algo blunder, its no surprise investor wariness is a concern.

It almost seems as though innovation has gotten a little too ahead of itself. Grandiose ideas are incepted, and technology is there to make them reality – sometimes even before all the glitches can be discovered and properly worked out. However, these issues are not unavoidable; all it takes is the right combination of innovators.

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Legions of investors have been schooled to believe that Treasury bond prices and the major stock market indices should move in the same direction.  In other words, changes in the valuations that investors attach to both high-quality sovereign debt and equity markets are presumed to be positively correlated.  In this context, it is not surprising that each time bond yields drop to fresh generational lows, the uber-bulls spring forth to declare that stocks have rarely looked so cheap relative to their fixed-income cousins.

The optimistic hypothesis however, is nothing more than a stale remnant of the dangerously flawed bull market thinking that dominated investment strategy during the heady days of the late-1990s.  Not surprisingly, the use of models that are without theoretical foundation ultimately proved disastrous for bottom-line investment performance.

The supposed positive relationship between bond and equity yields has not been observed in financial market fluctuations for more than a decade, as ever higher bond valuations have been greeted with lower cycle-adjusted price/earnings multiples.  Nevertheless, the tired argument continues to feature heavily in investment commentary, and few practitioners even bother to search for reasons as to why the presumed relationship may not be valid in the current climate.

It is important to appreciate that the secular trend in debt and equity valuations is regime-dependant, and what worked well in one period may not hold true in another.  The primary determinant of bond and stock market valuations is the volatility of inflation – the uncertainty regarding future inflation.  High levels of inflation uncertainty make it increasingly difficult to isolate the signal from the noise emanating from fluctuations in the general price level, and as a result, elevated inflation volatility is accompanied by relatively poor growth outcomes.

The historical record demonstrates that inflation volatility has been at its lowest when the inflation rate has been sustained in a range of two to four per cent.  This can be defined as the ‘sweet spot’ of effective price stability, and has historically been characterised by fewer and milder recessions, and higher long-term economic growth.  Once the inflation rate strays outside of the two to four per cent range, either above or below on a sustained basis during inflationary and deflationary regimes respectively, inflation volatility trends higher and negatively impacts long-run growth.

It is important to note that high inflation volatility is universally bad for equity valuations.  Investors demand a higher risk premium over and above the real risk-free rate to compensate for the greater variability in cash flows, and mark down equity valuations even further to reflect lower expected future real growth.

In other words, the high inflation volatility observed in both deflationary and inflationary regimes precipitates a secular bear market in stocks, as valuations are struck by the double-whammy of a higher real discount rate and a lower expected future real growth rate.  This is exactly the phenomenon that was observed in the deflationary 1930s, the inflationary 1970s, and once again in recent times, as inflation volatility jumped to the highest level in thirty years.

Although high inflation volatility is negative for equity valuations in both deflationary and inflationary regimes, the same is not true for Treasury bond yields.  An inflationary regime is accompanied by a secular bear market in bonds, as investors incorporate not only higher expected future inflation into yields, but also a higher inflation risk premium to compensate for the greater inflation uncertainty.

However, a deflationary regime is accompanied by a secular bull market in bonds, as investors become increasingly willing to pay a premium for financial assets that will provide insurance during poor economic states.  This effect has been particularly pronounced in recent times, as investors learned to their cost that few asset classes provided any protection whatsoever during the global financial crisis, and has been exacerbated by the relative shortage of safe assets arising from multiple sovereign rating downgrades and unconventional monetary policies.

An examination of the historical evidence reveals that the conventional Wall Street wisdom that presumes a positive relationship between changes in debt and equity yields is decidedly misplaced.  The truth of the matter is that bond and stock prices trend in the same direction only in disinflationary and inflationary regimes or roughly half the time.  In a deflationary regime, the financial assets part company, as the lower risk premium attached to safe bonds is accompanied by a higher risk premium attached to stocks.

Investment practitioners continue to insist that lower Treasury yields should result in higher equity valuations, even though debt and equity yields have moved in the opposite direction for more than a decade.  Elevated inflation volatility and the increased deflation risk calls for structurally lower equity valuations, and not higher as the uber-bulls seem to believe.  The astute will be aware that flawed thinking is bad practice.

www.charliefell.com

Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

The recent discovery of an interesting article on portfolio diversification got me thinking about this commonly accepted strategy amongst investors.  Walter Upgrave, senior editor for Money Magazine and “Ask the Expert” financial columnist, was the composer of the piece and in it, he addressed the question “I have about $1 million spread into 33 funds. Is that too many?”

Though having so much capital to invest that this even becomes a concern at all isn’t a ‘problem’ everyone shares, the question can still pervade portfolio inquiries of investors of any kind. In short, the answer was yes; with the premise of the article being “diversifying your portfolio is a good thing, but is it possible to have too much of a good thing?”

In this case, it is.

One of the reasons for this is that having too many mutual funds or ETFs within a portfolio exposes the investor to more company or sector risks. This, in turn, can negate the returns they were hoping for in the first place.

Though Upgrave can’t provide a finite number of funds that will best suit any investor, a good rule-of-thumb he offers is that anywhere between five and 10 should do the trick. Go beyond this and you’re likely to see things get a bit sticky. Something else to consider when seeking a diversification equilibrium is that it isn’t so much the number of funds you have, but rather, that your portfolio is meeting your financial needs. Depending on your age, will your portfolio be generating enough income without risking complete decimation should the financial markets take another dive?

When building a portfolio with diversification in mind, it is possible to achieve it with fewer funds spanning a wider variety of investments. Different advisers will provide varying allocation percentages, but most remain congruent with a roughly balanced mix of stocks (both US and foreign), bonds, mutual funds, and alternative investments.

Though still experiencing a relatively new serge in popularity (think post financial crisis), alternative investments are establishing a more permanent spot in an increasing number of investor portfolios. Hedge funds, managed futures (metals, foreign currencies, etc.), real estate, commodities, and derivatives contracts are some examples of popular alternative investments. In terms of diversification, the most alluring aspect of allocating a portion of your capital into investments of this kind is their obvious non-correlation to the stock market (i.e. the stock market crashes, this component of your portfolio won’t always go down simultaneously).

We all know that too much of a good thing can often mitigate desired results, and the same idea seems to apply to portfolio diversification. I think Warren Buffett says it best: “wide diversification is only required when investors do not understand what they are doing.”

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Our Two Cents – Week of 5/7/12

After watching I’ll Have Another race for the crown in the 138th Kentucky Derby last weekend, we’ll have another pass at our biggest headlines in the financial markets.

In the U.S., the economy added 115,000 jobs in April as the unemployment rate dropped to 8.1 percent from 8.2 percent. While the April figures registered less than initially forecast, economists said there wasn’t a reason to panic yet because the warmer winter months could have encouraged employers to start their spring hiring early. The private sector posted a gain of 119,000 jobs, according to ADP.

In the eurozone, France and Greece held their elections. French voters elected Francois Hollande, who is a champion of government stimulus programs, after he campaigned on the need for more growth-generating economic policies and less dependence on austerity. Greece’s election caused more uncertainty in the eurozone as voters leaned toward extremist parties, making it difficult to form another government that would support the country’s rescue package. As a result, the nation may hold another election in the next couple of months. Additionally, Spain announced its decision to help its banks by presenting measures to the banking industry. Officials said they would not rule out lending or introduce public money into the banking sector if necessary. For the eurozone’s jobs, high unemployment continued to rock nations as the 17 euro-using countries faced an unemployment rate of 10.9 percent.

For alternatives investments, hedge funds increased slightly in April, with the HFRX Global Hedge Fund Index reporting a 0.12-percent gain. The UCITS hedge fund assets under management increased in Q1 from 113 million euros to 120 million euros, a jump of 6.2 percent.

 

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Our Two Cents – Week of 4/30/12

While we’re still recovering from the Boston Bruins’ devastating playoff loss against the Washington Capitals last week, we tossed the sports pages for the business section to see how the financial markets scored.

While the U.S. economy only grew 2.2 percent in Q1 2012, there were signs that the economy thrived in the right places, including consumer spending. Personal consumption rose by 2.9 percent, exceeding expectations for a 2.3-percent rise, and up from 2.2-percent growth in Q4 2011. Personal incomes in March increased by the most in three months, as the Commerce Department said consumer income rose 0.4 percent last month. Confidence in the global economy grew substantially, according to the Q1 2012 ACCA/IMA Global Economic Conditions Survey, the largest global study of professional accountants. Thirty-two percent of respondents said they saw an uptick in U.S. business confidence, versus 18 percent in Q4 2011.

While Americans are feeling more financially confident, many are still uneasy about investing in the stock market. According to a new poll from Bankrate.com, about three-fourths of respondents said they were less inclined to investing in the stock market than they were a year ago. Perhaps it’s because of the stock market’s volatility, and they should consider methods of alternative investing. Speaking of alternative investments, hedge funds have outperformed other asset classes during the last 17 years, according to new research from KPMG and a hedge fund lobby group.

In the eurozone, Greece held talks with its international creditors about delaying by one year its medium-term deficit goals, working to ease the ongoing austerity measures on the economy. Across Europe, British Prime Minister said the continent was not “anywhere near half-way through” the economic crisis, but the German government said they’re more optimistic than Cameron about Europe’s financial stability. Cameron’s commentary came at a time when his country fell into a double-dip recession.

 


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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

Our Two Cents – Week of 4/16/12

The Boston Marathon has finished, the scorching weather has departed and another week has past. While cheering on the runners battling the heat—and Heartbreak Hill—during the 116th Boston Marathon, the financial markets also made a dash for themselves.

In the U.S., consumer confidence held to a four-year high as more Americans said their finances were in better shape. The Bloomberg Consumer Comfort Index posted minus 32.8 in the period ending April 8, second only to the prior week’s minus 31.4 as the highest since March 2008. Strong U.S. retail sales fueled economic growth in the first quarter, and analysts are optimistic that the economy grew at an annual pace of at least 2.5 percent during January-March. Also, the U.S. Federal Reserve said the country’s economy continued to grow at a steady pace since February. According to its latest national economic performance survey, the central bank said five districts, including Boston, reported moderate growth.

In the alternatives, hedge funds are rebounding in 2012 as investors have put more cash into hedge funds during the past month, according to GlobeOp. Now four months into 2012, hedge funds are off to their strongest start since 2006, with the average fund gaining nearly 5 percent in the first quarter of 2012. In 2011, more than 1,100 hedge funds launched, according to Hedge Fund Research.

In the eurozone, industrial production has risen for the first time since August 2011, showing signs of revived economic life for the region.

Strong retail sales ease growth worries, Reuters, April 17, 2012
Hedge funds attracting cash in 2012 rebound, Reuters, April 13, 2012
Consumer Comfort in U.S. Held Last Week Near Four-Year High, Bloomberg, April 12, 2012
US economy grows at steady pace: Federal Reserve, The Economic Times, April 12, 2012
New Sign of Economic Life in the Euro Zone, Institutional Investor, April 12, 2012
Hedge Funds Off to Best Start in Six Years, Wall Street Journal, April 11, 2012
HFR: Over 1,000 Hedge Funds Launch In 2011, FINalternatives, April 10, 2012

 

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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.