Pioneering the Alternative Beta Space
Yazann Romahi, J.P. Morgan Asset Management

A key thesis in the alternative beta debate is that it raises the standard for hedge fund managers and investors In the same way that traditional managers need to outperform traditional beta, Yazann Romahi has called for alternative beta to act as a tool for evaluating alternative investment managers and to serve as an impetus for reducing investment fees. This short opinion piece highlights how alt beta has moved from a theoretical concept to an investable reality.

 

Catastrophe Bonds: An Important New Financial Instrument
Michael Edesess, City University of Hong Kong

CAT bonds are issued by a reinsurer for indemnification against tail risks of a major disaster such as a hurricane, earthquake, or pandemic. If a “triggering event” (the covered catastrophe) occurs before maturity the bond may “default” in that investors may not be returned part or all of their principal, which is used to cover insured claims. CAT bonds may be indemnity bonds, meaning that principal is used to pay claims if they exceed in aggregate some specified minimum, or they may be “parametric” bonds if principal loss is triggered by a natural event, such as hurricane winds exceeding a specified minimum. This article covers the structure of cat bonds and their unique features.

 

Extending Rules-Based Factor Portfolios to a Long-Short Framework
Jennifer Bender and Taie Wang

In this article, the authors discuss the extension of rules-based factor portfolios to a long-short framework. Advanced beta (or smart beta) involves capturing well-known factors in simple rules-based ways. Long-short factor portfolios have historically provided compelling performance even after costs are accounted for. However, not all factors are created equal--some factors are more compelling than others in terms of their historical returns and volatility when expressed in a longshort framework. Most importantly, there is a trade-off between the returns of the portfolios and the cost of running the portfolios. The authors explore the nuances of the long-short strategy and find there are ways to reduce turnover to an acceptable level, such that the returns of the factor portfolios are still worthwhile.

 

Patient Capital, Private Opportunity: The Benefits and Challenges of Illiquid Alternatives
Avi Sharon, CAIA, Blackstone

In the ongoing search for diversification and higher returns, investors have shown increasing interest in deploying “patient capital” into less liquid or private market alternative investments (including Private Equity, Real Estate, Distressed Debt and other private funds). Yet in spite of this opportunity to enhance portfolio returns, individual investors remain under allocated to illiquid alternatives. In this article, the author assesses the return opportunity in private market alternatives for high-networth investors, and explores ways to mitigate the perceived challenges of investing in these assets.

 

Tactical Timing of Low Volatility Equity Strategies
Sanne de Boer and James Norman, QS Investors

Low volatility stocks have historically delivered higher returns with lower risk than the capitalizationweighted market. However, relative valuation levels have not been a good predictor of low volatility equities’ relative return. In addition, while low volatility equities’ performance may be more sensitive to interest rate changes than the capitalization-weighted index, both have delivered similar risk-adjusted returns (Sharpe ratios) in rising-rates environments. In this article, the authors examine the drivers of global low volatility equities’ performance from 1980 to the present.

 

Risk Parity Strategies at a Crossroads, or, Who’s Afraid of Rising Yields?
Fabian Dori, Manuel Krieger, Urs Schubiger, and Daniel Torgler, CAIA, Notenstein Private Bank and Vescore Ltd

Risk-parity strategies have gained considerable popularity in recent years. Their stable, attractive risk/return profile has helped corresponding multi asset-class strategies to become firmly established in a wide array of institutional portfolios. What is less clear is how to proceed with such investments in the future. This article provides an empirical analysis of risk-parity strategies and comments on the impact that fundamental factors behind interest-rate hikes, for example, can exert on return behavior.

 

Master Limited Partnerships
Frank Benham, CAIA, Steven Hartt, CAIA, Chris Tehranian, and Edmund Walsh, Meketa Investment Group

MLPs are publicly listed partnerships that invest primarily in the energy sector. The market has grown substantially in the past several years and is expected to continue to grow as the U.S. energy infrastructure market requires billions of dollars of additional investment. MLPs tend to provide attractive current yield and offer the opportunity for price appreciation. However, MLPs are more complicated from tax, accounting, and administrative perspectives. This article examines the use of MLPs in alternative allocations and highlights some of the key considerations for investors.

 

VC-PE Index
Mike Nugent and Mike Roth, Bison

North American private equity funds returned more money to investors than they invested during the first three months of 2015. Based on the cash flow data set we maintain, distributions outpaced capital calls by 1.9x. The “bubble vintages” were the most active, with more than 60% of the distributions coming from the 2006-2008 cohorts. Taking a “big picture” view of things, buyout funds appear to be doing a better job of monetizing value in their portfolios at a time when valuations are perceived by many to be elevated.

 

The IPD Global Intel Report
Max Arkey, MSCI Real Estate

While the equity market slowed and the listed real estate market turned negative during the second quarter, the IPD Global Quarterly Property Fund Index (GPFI) posted another strong quarter with a 3.5% return, or an annualized 13.1% return. As real estate becomes an increasingly global asset class, the development of the GPFI represents an important step in helping the evolution of the industry. Measuring fund performance presents challenges of comparability, consistency and transparency, particularly when investing globally. Although the GPFI is still in its infancy, it is a useful tool along several dimensions.