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Chronicles of an Allocator

Chronicles: July 2020

Issue 6, July 2020

Dear Investment Professional,

As we enter the depths of the summer months, we hope this new edition of Chronicles finds you safe and healthy.

Throughout this newsletter, a common theme exists: People. Whether we are focusing on the culture of an investment organization, embracing technological innovation to empower investor decision making, or advocating for more diversity and inclusion in this profession, we must recognize that people are our biggest asset in this industry. Moving forward, culture will increasingly become a major differentiator not only for intangible factors like engaging talent but also for tangible factors like performance.

In addition to culture, this newsletter also features topics on private equity, inflation, and democratization. Enjoy this edition of Chronicles – these articles were chosen to help you better inform your process of capital allocation and keep our CAIA community engaged even as we remain distanced.

Sincerely,

John L. Bowman, CFA, Senior Managing Director, Twitter, LinkedIn

Keith Black, PhD, CFA, CAIA, FDP, Managing Director Content Strategy, Twitter, LinkedIn

Aaron Filbeck, CFA, CAIA, CIPM, Associate Director, Content Development, Twitter, LinkedIn

Democratization of Alternative Investments

Is the Allure of Private Equity a Mirage?

Does the illiquidity premium really exist after fees? Can the efficient frontier really be expanded through private capital or can the same behavior be captured through highly indebted publicly traded small cap equities? Gain insight from a panel of experts that have wrestled and opined on this complex set of questions.

Panelists include: Gregory Brown, Executive Director and Professor of Finance at Institute of Private Enterprise, University of North Carolina, Dan Rasmussen, Founder and Partner, Verdad Advisors, Christine Kelleher, CFA, CIO, National Gallery of Art, Chris Schelling, CAIA, Managing Director, Windmuehle Company, and John Bowman, CFA Senior Managing Director, CAIA Association

Financial Returns In Reward-Based Crowdfunding

Is it pure altruism to finance others’ projects? Victoria Dobrynskaya, PhD, associate professor of Finance at National Research University Higher School of Economics looks at reward-based crowdfunding from the perspective of an investor. In light of the debate concerning investors’ motivation for participation, particularly in reward-based crowdfunding, she and her co-authors were the first to quantify the financial returns on reward-based crowdfunding projects and to show that such projects are, in fact, quite profitable for backers.

Current / Future State of the Industry

The Inflation-Deflation Debate and Its Impact on Asset Allocation

One of the key questions facing investors at the moment is whether inflation or deflation represents the bigger risk for the coming years. Economists are split on this and one of the reasons for the uncertainty is that COVID-19 represents both a supply shock and a demand shock for the global economy. Alan Dunne, CFA, Managing Director at Abbey Capital, discusses how allocators might protect against inflationary, or deflationary, shocks in multi-asset portfolios. Read more here.

Socially Distant Inflation

Along the lines of inflation, Keith Black, PhD, CAIA, CFA, FDP, Managing Director of Content Strategy at CAIA Association, provides his view of current expectations of inflation. A combination of businesses raising prices to keep afloat and an appetite for further expansionary fiscal policy from both sides of the aisle could lead to inflationary pressures that haven’t been priced into the market.

Stock Markets Rebounded. So Why Aren’t Companies Going Public?

The global spread of COVID-19 led to a dramatic reduction in new public listings in April and May, even as stock markets rapidly recovered from March’s crash. For investors in venture capital funds, this may mean lower returns, as delayed IPOs lead to later exits and possibly additional cash injections from VCs to “bridge the gap” between now and when companies eventually go public. Find out more.

Improving Investment Returns: Manager Sizing With Active Risk

In this Research Publication from Cambridge Associates, Jean Lu, Managing Director, and Jackson Moss-Hawkins, Associate Investment Director, discuss the intersection of portfolio construction and active risk. If an investor wishes to outperform a broad-based index, they must invest with managers that differ from the index. However, (active) risk management and proper communication to relevant stakeholders are important tools to help everyone better understand expected portfolio behavior.

Artificial Intelligence and Data Science

Changes Are Coming

Mehrzad Mahdavi, PhD and Hossein Kazemi, PhD, CFA of FDP Institute and Bill Kelly from CAIA Association discuss some of the major technological changes occurring across the investment profession. Issues surrounding regulation and data ethics, algorithmic improvements, and talent management will continue to be a driving force for change moving forward and professionals who manage to close the gap will have a competitive advantage relative to peers. Read their perspectives here.

Saving the World By Technologizing Institutional Investment

According to Ashby Monk and Dane Rook at Global Projects Center, Stanford University, being technologized means using technology to build and extend comparative long-term advantages for the organization; and every institutional investor has its own unique features that will lead to distinct advantages. In an industry that historically has not embraced technology, these advantages can not only improve investment alpha opportunities, but also improve operational alpha within the organization itself. Read their article.

Pursuing Diversification with Cryptocurrencies

This research note from Andrew Keenan, CAIA, CFA, CBP, Assistant Vice President – Valuation Risk and Control at Credit Suisse, examines the individual performance of select cryptocurrencies, their downside risk/distribution metrics, and their correlations with other asset classes on a stand-alone basis. Additionally, it back-tests six model portfolios to discern whether inclusion of cryptocurrencies would improve risk-adjusted returns and if so, under what terms.

Marcos Lopez de Prado: Lecture Archives

Marcos Lopez de Prado recently posted a link to a conglomerate of presentations, lectures, and seminars on the topic of machine learning in portfolio management. Included are ten lectures from his course, Advances in Financial Machine Learning, on topics such as data analysis, back-testing, and modeling.

Environmental, Social, & Governance

Change Is In the Air, But Will It Stay?

Deborah McLean, Managing Director of Global Relations at CAIA Association, discusses the diversity gap in alternative investments and the work we all must do to be more inclusive. This post comes on the back of an excellent panel moderated by Debbie, featuring Amanda Pullinger, CEO of 100 Women in Finance, Janet Cowell, CEO of Girls Who Invest, and Lindsay Burton, Founder & President of Kayo Conference Series.

Thinking Ahead Institute: Impact Culture

Culture is a unique ingredient in the struggle for competitive advantage among institutional investment organizations. There are ways for culture to be managed and developed over time, but it will take focus, patience, leadership, and process. This new paper from Thinking Ahead Institute discusses the factors and strategies for the effective implementation of a strong organizational culture. For those interested, Aaron Filbeck, CAIA, CFA, CIPM, Associate Director of Content Development at CAIA Association, recently wrote a blog post on some of the highlights of the report.

The Journal of Alternative Investments: Practical Applications

This issue of the JAI deals with climate change and its impact on the investment industry. Professor Darwin Choi is the editor of the issue, and his introductory essay provides an excellent review of the topic and the papers that follow. Topics include carbon exposure of institutional investors, climate risk for real estate, green bonds, and solar energy. Practical Applications Reports help readers find the relevant conclusions from the research published in The Journal of Alternative Investments. Each report presents the central concepts of the research in an accessible format, helping readers navigate towards those articles that suit their investment needs and interests with ease.

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All posts are the opinion of the contributor. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the contributor's employer.