Q1 2019 AIAR Vol. 8 Issue 1

Blockchain, a distributed ledger, emerged as a promising technology more than a decade ago. There are now public and private blockchain types as well as a hyprid consortium type. One blockchain application in the financial world is improving the know your customer compliance process. A common myth is that blockchain is completely immutable, and some potential road blocks to applications include the entry cost of upgrading legacy software and regulatory uncertainty. In this paper the author reviews the types and uses of blockchain today, debunks five common persistent myths about blockchain, and identifies seven major roadblocks that could stall blockchain’s expansion such as standardization.

Acknowledging and explaining the difficulties inherent in traditional asset allocation, these authors then provide a framework for asset allocation that is based on extended diversification. It provides risk management through diversification to not only control risk but to add value. Specifically, the framework finds sources of return through equity beta, as well as orthogonal factor risk premiums and various sources of alpha. Orthogonal factor risk premiums may be derived from exposure to a range of assets classes. Sources of alpha are derived from skills applied to achieve one or more goals such as to control risk factors or to adjust beta exposure dynamically.

This paper explores the added value of infrastructure debt in a portfolio context for both pension funds and insurance companies. The asset class appears to have an attractive risk-return tradeoff in combination with diversification potential in a fixed income portfolio. Given the limited available benchmark data, care is needed when interpreting the results of the asset and liability management model. The authors therefore also carried out several sensitivity analyses, which in general support the robustness of their findings.

The authors of this paper illustrate that long-short managed futures strategies are well suited as an effective hedge against market turmoil in traditional asset classes. This, and the added value in the strategy’s risk/return profile is attributable to several factors, including the possibility to take on profitable short positions when underlying markets decline. Many of us have heard the phrase “keep it simple, stupid,” noted by the U.S. Navy in 1960 as a design principle - similar to Ockham's razor. The authors of this paper use the KISS acronym to succinctly and simply describe managed futures as “King In Stress Scenarios.”

This paper illustrates the heterogeneity that exists within the same academic alternative risk premia (ARP) strategies due to the many implementation choices available. The author also distinguish between academic ARPs and trading ARPs, examines more than 350 investable ARP indices and reports the frequency of strategies in the sample, statistical characteristics and correlations among the strategies’ returns. Results indicate that ARPs tend to deliver absolute returns, but many are sensitive to the market environment. The detailed results highlight the importance of diversification within an ARP strategy across funds to reduce the concentration of model risk, and the use of appropriate risk management tools to address the non-normality of these strategies’ returns.

The real estate industry is one that has lagged others in adapting to the recent changes in technology. It has been slow to innovate, yet the industry appears destined to become digitized. This presents several opportunities including better data analytics, digital platforms, and the use of Internet of Things (IoT) for "smart" buildings. It also presents several significant challenges that industry participants must overcome to avoid becoming obsolete. This paper outlines the significant changes expected as the industry experiences a structural shift.

The market for real assets is now mature in the sense that most major asset managers now have an established real asset unit. This paper describes the current state of the real asset market including its many subsectors, and the asset management trend beyond diversification towards real assets: now the trend is also diversification, but within real assets. Implementation can be challenging. Increasingly, real asset diversification includes niche strategies and building direct exposures.