Tag Archives: bond

With the current wild Euro-debt ride we’ve been on that’s had everyone stumbling all over the market, what better time than now to reevaluate where alternative investments stand in your portfolio?

Alternative investments are basically any component of an investment portfolio that isn’t traditional long-only stocks or bonds. Their primary purpose is to provide diversification within an investor’s portfolio by giving them a place to allocate their money that is not correlated to the stock market. Today, with the prevalent volatility of stocks and their concert movements with the European debt crisis, alternatives have been generating traction amongst weary investors. Of course, they can also be influenced by current global economic conditions, but not in equivalence with stocks and bonds.

Most recently, the hedge fund industry’s been receiving a fair amount of attention, as the media seems to like tracking its performance quite closely.  The Wall Street Journal provides a good summation of a June 2012 Citigroup survey entitled Institutional Investments in Hedge Funds. In it, forecasts were made that the current hedge fund industry could very well double in size its managed assets to become over $5 trillion within the next five years.

The survey gathered information from 80 hours of interviews with 73 investors, consultants, and money managers who see the hedge fund industry progressing beyond its formerly private, limited access status into a more mainstream investment option. Where before, hedge funds made up a smaller portion of alternative investments, they are now making moves to a more central position within portfolios. With this transformation comes stricter regulation, compliance demands, and transparency within the industry, all additions that will hopefully help in legitimizing hedge funds and projecting them in a less risky light.

One of the stronger historic examples illustrating how hedge funds have come in clutch during rough market times was back in the early 2000’s as portfolios that had them incorporated were able to out perform their traditional 60 percent equity/ 40 percent bond structured brethren portfolios. This induced a surge of more than $1 billion in capital flow directed into this asset class for the proceeding few years.

The idea of today’s projected five-year hedge fund boom is based primarily on a predicted increase of established institutional investors using them as a diversification and risk management tool. This alone could generate $1 billion in hedge fund strategy allocations, while another $2 billion could come from these funds marketing themselves as a more commonplace regulated alternative investment product competing with traditional asset managers.

In a June 11 MarketWatch article announcing how hedge funds are establishing a presence in China’s growing alternative investment industry, Hedge Fund Association (HFA) president Mitch Ackles states that globally, hedge funds are moving into the investment mainstream. PerTrac, a leading worldwide aggregator of hedge fund data, found that there were 658 hedge funds in China as of April 2012; half of them having been formed within the past two years.

In the US, Neuberger Berman made a bit of investment history by being the first asset manager of its caliber (US$199B in AUM) to create the first Multi-Manager Fund. This fund is basically a hybrid investment mechanism structured after a mutual fund, but operated using hedge fund strategies. It is run by a group of fund of hedge fund professionals who feel that this type of investment should be available to a wider range of investors who in the past, have not been able to access hedge funds. The benefits of this hedge fund inspired investment vehicle are daily liquidity, lower investment minimums, full portfolio transparency, and no performance based management fee.

Neuberger Berman’s Multi-Manager Fund could be a big step in the direction of closing the gap between non-high-net worth investors and the ability to access hedge fund strategies. This is really fascinating to me because it is the same concept that inspired the creation of Currensee. Currency trading, a different type of alternative investment, was at one time only possible for professional foreign exchange traders, multinational banks, and high-net worth investors. Now, with the advent of trade replication software, investors of any kind can have equal access the world currency markets.

-------

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.

3 Comments

The Euro Zone periphery countries are major news drivers in the markets right now. Developments surrounding these so-called PIIGS (Portugal, Ireland, Italy, Greece, Spain) have become big drivers in not just the euro, but in the whole forex market. In fact, they have been moving stock, bond, and commodity markets as well. No doubt this is something which will carry on for a while.

The Greek bailout is probably the most dominant aspect of the sovereign issues right now. There have been voices on all sides talking about the need for a Greek default and exit from the euro, the extreme negative impact of a default/exit on the markets making that unthinkable, and everything in between on the opinion scale. I want to speak to the euro exit idea in this post.

Think on this question. What happens if Greece leaves the single currency?

Those who favor that kind of solution – or who at least think that's the inevitable course – see that kind of move as being a way for Greece to clean the slate and become more competitive. The latter would be as a result of what would presumably be a weaker drachma than the euro. That would be good for the balance of trade, at least in theory. Sounds pretty good, right?

I'd put forth two potential major problems, however.

First, if Greece goes back on the drachma and it does indeed lose value relative to the euro, what impact would that have on the price of goods for businesses and consumers? Does Greece import a lot from the Euro Zone? Would the weaker drachma produce a price inflation via import prices? That certainly wouldn't help the Greek economy at all.

Second, what happens to the existing debt of government, businesses and individuals that is currently denominated in euros? In a falling drachma situation, the cost of debt maintenance for euro-denominated liabilities would rise. That could have a potentially meaningful negative impact on the Greek financial system and economy, an impact not improved at all if there's a rash of defaults.

There's been a serious issue with this very sort of problem in Eastern Europe where consumers took out loans denominated in Swiss Francs. The Franc has been rising steadily for some time now, making those mortgage payments in local currency terms get more and more expensive to the borrowers. Imagine the impact on your monthly budget if your mortgage payment rose by 40%, which is about how much the Franc has gained against the dollar in the last 12 months.

So the question is what kind of exposure are we talking about here? Does the Greek private sector have a major euro liability exposure?

The impact of a weak drachma on the Greek economy in these sorts of terms is not something I've seen any discussion of so far. If a removal from the Euro Zone is to be contemplated, the questions above would have to be satisfactorily answered.

Looking for answers and more information? Currensee is hosting Charlie Fell, Jamie Coleman and Bob Iaccino on July 21st at 12PM EST to discuss. Register for their free webinar here.