Q3 2014, Vol 3, Issue 2

The occurrence of trends within financial markets is inconsistent with the assumptions of classical financial theory. Nevertheless, it can be empirically validated that market prices can be subject to trends and profitably exploited. But − which trends should you measure? Which trend is your friend? This paper shows that this question cannot be answered solely on the basis of the data. Rather, various aspects have to be considered in order to decide which method is regarded as appropriate in which environment. The length of the measured trend, the way the signal is compared and, ultimately, the conversion of the signal into a position are key factors that determine the character of the trend sequence. These factors can also be used to classify different CTA strategies and assess their risk/return profile more accurately.

 

AIAR interviews Bob Swarup about his new book Money Mania: Booms, Panics, and Busts from Ancient Rome to The Great Meltdown.

 

Commodities are now treated as a mainstream asset class. As of April 2012, Barclays Capital reported that assets under management in commodity-based exchange traded products, structured notes, and index swaps totalled a record high of $435 billion versus $100 billion of investment in 2006. This rise can be explained in part by the fact that commodities are now standard components of an investor’s strategic asset allocation due to the fact that they generate equity-like returns in the long-run, act as risk diversifiers, and serve as inflation hedges. One easy way to gain exposure to commodities consists simply in tracking an index. At present, the universe of commodity indices is split into three categories: 1) the first generation indices, which are long-only and do not pay much attention to the fundamentals of backwardation and contango, 2) the second generation indices, which are also long-only, but attempt to lessen the negative effect on performance of contango while exploiting backwardation, and 3) the third generation indices which are long-short and capitalize on both the price appreciation associated with backwardation and the price depreciation related to contango. This paper narrates the history of commodity indexing in brief, introduces new developments, and appraises the performance of the different generations.

 

The financial crisis and persistent market volatility have intensified investor bias toward liquid securities. Unfortunately for investors, this increased demand has coincided with deteriorating yields for highly liquid assets in the public markets. Yields in more liquid assets have been decreasing due to a shortage of supply, while yields in less liquid parts of the market have been increasing due to a lack of demand. The result has been an increase in the illiquidity premium – that is, the difference in yield between liquid and less liquid securities. As investors’ demand for liquidity has increased, so too has the relative cost of owning a fully liquid portfolio. This paper will discuss the mismatch between the demand for and supply of liquid securities and offer alternatives for those willing to employ a long-term alternative investment strategy.

 

The “endowment model” of investing has been synonymous with increasing allocations to alternative investment strategies, defined largely as hedge funds, private real estate, private equity, venture capital, and other less liquid strategies. There is clear academic and empirical evidence that these alternative investment strategies have contributed significantly to portfolio returns over the last 20 years. The fundamental principles that have contributed to higher investment returns remain largely unchanged as we look ahead. Nevertheless, allocations to alternatives should be reserved for investors who can access top-tier managers, since the distribution of returns among alternative managers is far greater than it is among traditional managers. Further, it is important to consider the following questions: have investors been adequately compensated with higher risk adjusted returns compared to traditional strategies over this period of growth? And, perhaps even more importantly, what should investors expect from their allocations to alternative strategies in the future? This paper provides a basis for discussion of these and other issues pertaining to alternative investment strategies in the years to come.

 

As the recovery period from one of the worst recessions in our history continues on, life for the fledgling and even, often times, experienced entrepreneur has been tough. Indeed, President Obama remarked that credit has been tight, and no matter how good ideas are, if an entrepreneur can’t get a loan from a bank or backing from investors, it’s very difficult to get their businesses off the ground. In response to this ever-present need for business funding, and in an attempt to stimulate the economy and job growth, Obama signed the Jumpstart Our Business Startups Act (“JOBS Act”) into law on April 5, 2012. The Act, among other things, increases a business’s access to capital by enabling them to sell securities to both accredited and non-accredited investors without registering or completing the full disclosure requirements typically required for public offerings. The overarching purposes of this paper will be to: 1) explain and analyze the relationship and overall dynamic that will exist between crowdfunding and VCs; 2) elucidate why investors should avoid or, at the very least, be wary of investing money through the crowdfunding medium; and 3) expound reasons as to why crowdfunding as a means of financing should be used as a last resort for a budding entrepreneur.

 

Risk is often defined as exposure to change. Spotting change, therefore, is important. There are essentially three approaches to change: 1. Displaying complete ignorance, 2. Having a wild guess as to what it means, or 3. Measuring it in a systematic fashion with an applicable methodology and adapting to it. The author recommends choice number 3. Momentum can be perceived as a philosophy. The author discusses the Momentum Monitor (MOM) and recommends it as a risk management tool. If risk is defined as “exposure to change,” then one ought to spot the change.

 

Private equity returns are bouncing back. Whether or not returns bounce back to pre-global financial crisis levels remains to be seen. Buyout funds have consistently outperformed the All Private Equity classification; venture capital performance has seen a resurgence of late, but investors will want to see if it continues.