Today's Post

    Private Equity: Sometimes you get what you need… 2011 was the year private equity managers learned to accept that what they got even if it wasn't always quite what they wanted. Investors talk about what they want and need in 2012.

    The Rolling Stones knew it well and private equity managers have had this lesson reinforced many times over in the course of the years and 2011 proved another steep learning curve. "You don't always get what you want, but sometime you get what you need." Private equity managers saw wants and needs ebb and flow throughout 2011, according to the year-end report on private equity investing from Preqin. 2011 started out with some small improvements in fundraising, deal and exit conditions, as well as performance. The second half of the year proved to be a bit more challenging, according to Preqin, as the European debt crisis brought precarious economic conditions and investors pulled back. The latter part of the year also brought a new challenge--increased scrutiny of private equity by the press and the public as Mitt Romney with his connection to Bain Capital entered the U.S. presidential race. The report says there was a "moderate increase in aggregate capital garnered by private equity funds that closed in Q1 2011 against the ...

Featured Post


CPI Isn’t Made Up


By John Brynjolfsson A CPI critic recently suggested that Ben Bernanke thought CPI homeowner equivalent rent is a "made up" figure. Nothing could be further from the truth. Over the years I've been impressed with the rigor of CPI, unimpressed with its critics, and unable to find a better measure of the cost of living. Outside the BLS, I may be its only fan! Ben Bernanke did say CPI Home Owners Equivalent Rent (HOER) is "imputed." So in defense of CPI, I ask ...


CAIA Corner: Walk Like an Endowment


The sixty largest US college endowments (those with over $1 billion in assets) once again have chart-topping performance. After suffering drawdowns and liquidity issues in 2008 and2009, these large endowments earned average returns of 12.2% in the fiscal year ending June 30, 2010, the latest period available, which beat the returns of smaller college endowments over the same period. Ten year annualized returns of 5.0% refute the idea of a lost decade, and the three-year drawdown of an annualized -3.5% ...

Guest Posts


‘Turtles—Turtles—Turtles All the Way Down’

By John Brynjolfsson, CIO Armored Wolf As markets reel in the wake of the failed German Bund auction that occurred earlier this week, our beliefs regarding financial security are rightly shaken down to their very foundation, and below! After all, 10-Year government bonds, at least as introduced to students in business schools over the past 70 years, are a way for those who have cash in their pocket to transport that cash, risklessly, 10-years into the future.  If so, what better government ...


Risk management

What Were They Thinking? From MF Global to Raj & Bernie to LTCM…
The right question is not what were they thinking, but what were they feeling? Get organized about detailing what feelings are being acted out and you’ve landed on the missing link in risk prediction.

As investigators continue their search through the ashes of yet another billion-dollar bonfire and as the CFTC calls for still another regulatory revamp, we find ourselves asking the virtually perennial question: “What were they thinking?” Given that about the best we ever come up with is “greed,” could it be that as the parades of trades gone wrong marches on, it’s time to ask a different question, or maybe two questions. For one, did you know that it is literally impossible to make a decision without emotion? I bet you didn’t. In ...

Real Estate

Preqin: Real Estate Funds Turn to Debt Strategies
"Farhaz Miah, of Preqin, sets out the numbers for private real estate fundraising in 2011, showing that the market continues to suffer from the impact of the 2008 crisis. He notes, also, that debt strategies have become increasingly popular, both in specifically debt-strategy funds and in opportunistic funds that employ debt strategies as part of a broader structure."

Preqin, the multi-national data and consulting firm, in its latest Real Estate Spotlight, features a review, by Farhaz Miah, of private real estate fundraising in 2011, which finds (unsurprisingly), that debt strategies “have become increasingly popular in recent times, with fund managers seeking to exploit opportunities presented by market dislocations.” The top four largest funds to close in that year each used debt strategies in various degrees. Miah, using data collected for the 2012 Preqin Global Real Estate Review, begins his discussion with the history of fundraising in this market since ...

UCITS

ESMA and EDHEC on Indexes and Tracking Errors
Since transaction costs and the illiquidity of certain portions of an index make ideal tracking impossible, there will be a difference between the return of a tracking ETF, such as those tracking ETFs that are structured as UCITS in Europe, and the return of the underlying index or benchmark. The European Securities and Markets Authority maintains that investors should be informed of the factors that are likely to affect the size and the volatility of this difference.

The European Securities and Markets Authority has issued a consultation paper on exchange-traded funds and related issues within the UCITS system. EDHEC-Risk Institute has replied, both with a press release and with a 70- page white paper of its own. The EDHEC press release observes that ESMA has in the past too often discussed and regulated different instruments as if they inhabit different “silos,” and that this “silo approach [had it continued] would have increased the risks of adverse selection by investors and regulatory arbitrage by issuers.” Thus, EDHEC-Risk happily notes, ...

Institutional Investing

Considering a Duty to Hedge

The Hartford (CT) CFA Society recently hosted a workshop on “Pension Risk Management and Governance.” The discussion proved to be mostly, though not exclusively, about ERISA and about how plan sponsors may arm themselves against the sorts of litigation it may inspire. Moderator Martin Rosenburgh, who is both an attorney and a financial analyst, and currently working as a compliance consultant to investment managers, set the tone early. He discussed “fiduciary duty on the strategic level,” saying that most of the case law in which plan managers are found to have ...

Alpha Strategies

OTC Derivatives: Terrain Shifts to Favored Emerging Market Jurisdictions
Emerging OTC derivatives in the emerging markets of Latin America and Asia are just one more sign that these countries are growing up.

Celent has issued a report on the over-the-counter derivatives markets in Asia and Latin America. It contends that the central clearing of OTC derivatives will become a common feature of markets in those regions in the months and years to come, indeed, that a number of central counterparty clearinghouses will come on-line as early as later this year, and Celent senior analyst Anshuman Jaswal suspects this will change the geography of the markets. The report begins ...

Retail Investing

Alpha Hunters: Bringing Long-Short Equity to the Masses
AAA sat down with Alex Gurvich and Jim Mitchell, both of The Rockledge Group, an investment advisory firm headquartered in Brooklyn, New York. We began by discussing the mid-January launch of a new product that gives the long-short equity strategy an ETF format, and ended up talking about a good deal else, such as the inherent superiority of ETFs over mutual funds, and Pimco's recent recognition of that fact.

Alex Gurvich is one of the founders of Rockledge Group, which was founded in 2004. Before that, he worked at GE Capital, the investment division of General Electric, managing a technology venture-capital portfolio. The other founders of Rockledge developed and tested the basic strategy while at CIGNA before 2004. Rockledge's first product was a traditional long-only sector allocation fund called Rockledge L2, and this has a track record going back to April 2005. This Rockledge L2 ...

Alpha Strategies

Alpha Hunters: Viewing Asia from Top-Down and Bottom-Up
Alpha Hunter Khiem Do talks about Asia and where the alpha is from his perspective.

Working out of Hong Kong, Khiem Do is the head of the Asia Multi Asset Team, a member of the Global Multi Asset Team, and a member of the Strategic Policy Group, of Baring Asset Management. He joined Barings in 1996, arriving from Citicorp Global Asset Management in Sydney. We spoke to him on the evening (HK time) of January 26, the first trading day after the Chinese New Years’ holiday. We began with a ...

Performance, Analytics & Metrics

A Word of Caution on the Modified Distribution
Peter Urbani looks at Cornish Fisher and modified VaR as a function of skewness.

By Peter Urbani* It has become popular to use the Cornish Fisher modification to the normal distribution to add the impact of skewness and kurtosis to fund distributions and Value at Risk (VaR) calculations. This is generally called mVaR OR ‘modified’ VaR. Unfortunately the Cornish Fisher modification suffers from two rather serious drawbacks that some users may not be fully aware of. Firstly it is not strictly monotone with respect to the confidence level and skewness being ...