Browsing: risk management

Posts Tagged ‘ risk management ’

Gump’s Law and the Butterfly Effect

May 6th, 2021 | Filed under: State of the Industry, Access to Alternatives, Featured Post, Newly Added, Asset Allocation, Risk Management

By Alexander Ineichen, CAIA, CFA, FRM At the beginning of 2019, 50 out of 50 economists surveyed by the Wall Street Journal thought that 10-year Treasury yields wouldn’t fall below 2% during the year. They did. Remember: The herd instinct among forecasters makes sheep look like independent thinkers.[1] —Edgar FiedlerRead More


What Hedge Fund Risk Systems Don’t See

Mar 16th, 2021 | Filed under: Featured Post, Newly Added, Risk Management, Hedge Funds

By Linus Nilsson and Rikard Lundgren Many investors, trading floor managers, fund of fund allocators, and risk managers have experienced unexpectedly large losses that were not predicted by their risk management systems. Seemingly out of the blue, a safe portfolio can generate large losses for reasons that had not beenRead More


Enhancing an Income Portfolio with Factor Design

Feb 21st, 2021 | Filed under: Featured Post, Newly Added, Asset Allocation, Risk Management

By Daniel Fang, CFA, CAIA, Lead Portfolio Manager at Emotomy, and Sabrina Bailey, CEO at Emotomy Interest Rates to Stay Lower for Longer Since the Great Financial Crisis, central banks across all major economies have kept interest rates low to stimulate economic growth (See Exhibit 1). This trajectory took aRead More


What About Beta? | What Happens When the GameStops?

Jan 31st, 2021 | Filed under: Newly Added, What About Beta?

By Aaron Filbeck, CFA, CAIA, CIPM, FDP The last time I saw so many newly minted investment experts on social media was four years ago, December 2017. Bitcoin had hit all-time highs, and the dreaded feeling of FOMO was causing clients to move as quickly as they could to getRead More


Private Equity and the Leverage Myth

Jan 6th, 2021 | Filed under: Featured Post, Private Equity, Private Debt, Newly Added, Asset Allocation

By William Kinlaw, CFA This article offers commentary and highlights from “Private Equity and the Leverage Myth” by Megan Czasonis, William Kinlaw, Mark Kritzman and David Turkington in The Journal of Alternative Investments. You can read the full paper here.  The private equity market is on an astonishing growth trajectory.Read More


Using ESG as a Risk Management Tool

Dec 10th, 2020 | Filed under: State of the Industry, Newly Added, Asset Allocation, ESG, Risk Management

In the first half of 2020, a period dominated by the spread of the Covid-19 virus and by the shut-down of economic activity in country after country around the world, investing with an eye to environmental, social, and governance issues proved valuable as a risk management measure, according to anRead More


OECD Works on Sorting Through the ESG Ratings Systems

Nov 8th, 2020 | Filed under: State of the Industry, Featured Post, Newly Added, Asset Allocation, ESG, Risk Management

A report from the Organization for Economic Cooperation and Development critiques “current market practices” in connection with Environmental, Social, and Governance investing. It says that the bewildering ratings, investment terminology, and individual metrics, “present a fragmented and inconsistent view of ESG risks and performances.” On the bright side, the OECDRead More


Subscription Line of Credit: Benefits, Risks, and Distortions

Sep 29th, 2020 | Filed under: Featured Post, Private Equity, Private Debt, Newly Added

By Hossein Kazemi, PhD, CFA, CAIA Association, FDP Institute, and Isenberg School of Management A subscription line of credit (SLC) is one of many sources of funding that general partners (GPs) can use to invest, manage, size, and time a private equity fund’s cash flow. By far, the largest sourceRead More


The Case for Redefining the Risk-free Asset

Sep 13th, 2020 | Filed under: Featured Post, Newly Added, Asset Allocation, Risk Management

The quantitative analysis of markets, and of the performance of fund managers, is in large part the mathematical treatment of various (often contested) metrics of risk. Let us bring two points about risk into collision. First, over more than three decades scholars have debated the “equity premium puzzle.” Why doRead More


IS DOWNSIDE RISK PRICED IN CRYPTOCURRENCY MARKET?

Aug 23rd, 2020 | Filed under: Emerging Asset Classes, Access to Alternatives, Featured Post, Newly Added, Asset Allocation, Risk Management

By Victoria Dobrynskaya, PhD, associate professor of Finance at National Research University Higher School of Economics Looking at the whole cryptocurrency market through the prism of standard multi-factor asset-pricing models reveals that there is a significant heterogeneity in the exposure to the downside market risk across coins, and that aRead More


An ‘Alternative’ Safe-Haven

Jul 26th, 2020 | Filed under: Featured Post, Manager Selection, Newly Added, Asset Allocation, Risk Management

By Karl Rogers, ACE Capital Investments Abstract: The sovereign bond market has traditionally been a widely used tool for portfolio construction given its dual characteristics of returning a real yield with a negative correlation to equity markets – providing both a real return expectancy and portfolio protection. Given the zero-lower-boundRead More


Hedge Funds and 2 Economic Crises: Focus on Systematic and Algorithmic Hedge Funds

May 28th, 2020 | Filed under: State of the Industry, Featured Post, Newly Added, Asset Allocation, Hedge Funds

By Hossein Kazemi, PhD, CFA, Senior Advisor at CAIA Association During the Global Financial Crisis (GFC), the role of hedge funds and their potential to provide significant downside protection was hotly debated. The same debate has resurfaced earlier this year again when markets for risky assets experience double-digit declines withinRead More


Time-varying Equity Volatility Markedly Affects Hedge Fund Performance

May 19th, 2020 | Filed under: Featured Post, Manager Selection, Newly Added, Risk Management, Hedge Funds

By Masao Matsuda, CAIA, FRM, Founder, Crossgates Investment and Risk Management One would think hedge funds can weather market gyrations better than long-only equity investments as hedge funds have greater flexibility in determining the levels of market exposure.  However, while some individual hedge funds may have been successful in adverse marketRead More


Volatility Forecasting Across the Financial Markets

May 12th, 2020 | Filed under: Featured Post, Newly Added, Asset Allocation, Risk Management

By Mark Caslin, CEO, Alder Capital Uses of volatility forecasting in financial markets Volatility is generally accepted as the best measure of market risk and volatility forecasting is used in many different applications across the industry. These include risk management, VAR, portfolio construction and optimisation, active fund management, risk-parity investing,Read More


Model Risk Management as Algo Trading Expands

May 10th, 2020 | Filed under: Data Science & AI, State of the Industry, Newly Added, Risk Management

The FICC Market Standards Board Ltd. (FMSB) is a London-based standards body for participants in the wholesale fixed income, currencies, and commodities (FICC) markets. It has been looking into the root causes of market misconduct, and pursuant to that research it recently published a report on the “themes and challenges”Read More


Peeling Back the Wrapper of Hedge Fund Strategies

Apr 13th, 2020 | Filed under: State of the Industry, Access to Alternatives, Newly Added, Asset Allocation, Risk Management, Hedge Funds

By Aaron Filbeck, CAIA, CFA, CIPM, Associate Director, Content Development at CAIA Association During CAIA Association’s most recent Virtual Chapter event, Keith and I (virtually) sat down with Chris Tidmore, CFA, CPA at The Vanguard Group to discuss Vanguard’s recent whitepaper, “The Wrapper Matters: Comparing Liquid Alternatives to Hedge Funds”Read More


Covid-19 Alpha

Mar 31st, 2020 | Filed under: State of the Industry, Newly Added, Risk Management

During the Global Financial Crisis, the financial world learned that, in times of calamity, “the correlations of risk-on assets move towards one.”  Asset classes that had appeared to be uncorrelated and which appeared to contain only idiosyncratic risks suddenly became correlated.  It turned out that systemic risk (correlation) was non-linear. Read More


Using Alternative Data and Machine Learning in Alternative Asset Classes

Mar 30th, 2020 | Filed under: Data Science & AI, State of the Industry, Access to Alternatives, Newly Added, Risk Management

Keith Black, PhD, CFA, CAIA, FDP, Managing Director of Content Strategy, CAIA Association Michael Oliver Weinberg and Peter Strikwerda work at the Dutch pension fund APG and serve as the head of hedge funds and alternative alpha and the global head of digital and innovation, respectively. CAIA Association and FDPRead More


Diversification: The Only Free 3-Course Meal?

Mar 17th, 2020 | Filed under: State of the Industry, Newly Added, Asset Allocation

By Aaron Filbeck, CAIA, CFA, CIPM | Associate Director, Content Development at CAIA Association Depending on the day this blogpost is published, equity markets could be up 10% or down 10%. I guess timing blogposts is just as hard as timing the market these days. We often refer to diversificationRead More


Beyond the Meat; Beyond the Traditional

Feb 6th, 2020 | Filed under: State of the Industry, Private Equity, Newly Added, Asset Allocation, ESG, Hedge Funds

By Aaron Filbeck, CFA, CAIA, CIPM, Associate Director, Content Development at CAIA Association Building the Burger I love when our industry uses analogies to describe investment concepts, so I must applaud one of the introductory pieces to JPMorgan’s 2020 Global Alternatives Outlook. In their introduction to the report, the authorsRead More


SASB + TCFD = Common ESG Disclosure Standards?

Jan 26th, 2020 | Filed under: State of the Industry, Featured Post, Newly Added, Asset Allocation, ESG, Risk Management

The Sustainability Accounting Standards Board (SASB), a non-profit organization has developed industry-specific standards across environmental, social, and governance topics, working toward a consensus on the sorts of disclosures that the issuers of securities should and will make to their investors. In November 2018, SASB released complete standards for 77 industries.Read More


Requiem for a Heavyweight

Dec 2nd, 2019 | Filed under: Manager Selection, Newly Added, What About Beta?, Risk Management

By Bill Kelly, CAIA Association CEO A requiem is a solemn chant for the repose of the dead. Chant-worthiness when it comes to the Enron Corporation is still subject to much debate depending, of course, upon which side of that trade you were on as the company slipped into bankruptcyRead More


Bitcoin Derivatives Behaving Just Like Other Underlying Assets

Oct 15th, 2019 | Filed under: State of the Industry, Access to Alternatives, Featured Post, Newly Added, Asset Allocation, Risk Management, Hedge Funds

Bitcoin derivatives act a lot like the derivatives of other asset classes. Two scholars at the University of London recently looked at bitcoin’s “volatility smiles and skews” as found in the short and long dated maturity of options traded at the Deribit Exchange in 2019. Helyette Geman and Henry Price,Read More


Low Vol vs Option-Based Strategies

Oct 6th, 2019 | Filed under: State of the Industry, Featured Post, Newly Added, Risk Management

By Nicolas Rabener of FactorResearch (@FactorResearch) INTRODUCTION Some investment products and strategies can be considered toxic given their history on Wall Street. Portfolio insurance is rarely used in marketing materials, given its role in the 1987 stock market crash. CDO-Squared instruments and structured investment vehicles (SIVs) are also unlikely toRead More


Equity Differential: A Factor in Currency Returns

Jul 23rd, 2019 | Filed under: State of the Industry, Featured Post, Newly Added, Asset Allocation, Commodities & Natural Resources

A recent publication by two executives of State Street Associates identifies a new factor in currency turns, which it calls the “equity differential.” In effect, it argues for the viability of a trading strategy based on this factor. The paper argues that the differential in trailing equity market performance stronglyRead More


Fixing the Sharpe Ratio: A Machine Learning Approach

Jun 16th, 2019 | Filed under: State of the Industry, Featured Post, Manager Selection, Newly Added, Risk Management, Hedge Funds

The Sharpe ratio has long served as a simple but important item in the due diligence tool kit. Formulated by William F. Sharpe in 1966 and first called the “reward to variability” ratio, the number arises from an investment’s rate of return minus the risk-free rate divided by the standardRead More


Assessing Risk Measurement for a Portfolio of Hedge Funds

Jan 27th, 2019 | Filed under: Data Science & AI, State of the Industry, Featured Post, Newly Added, Risk Management, Hedge Funds

Two scholars, Shubeur Rahman and Ranjan Bhaduri, have in a new paper taken a fresh look at a long-standing dilemma in the alternative investments industry. The question is: how should investors in hedge funds (especially in a multi-asset class, multi-strategy portfolio of hedge funds) measure the market risk inherent inRead More


Panayiotis Lambropoulos: The View from a Public Pension Manager’s Office

Nov 11th, 2018 | Filed under: State of the Industry, Featured Post, Manager Selection, Newly Added, Asset Allocation, Risk Management, Hedge Funds

On Nov. 13, the 24th Annual National Pension and Institutional Investment Summit convenes in Dallas Texas. CAIA is a sponsor of this event. Panayiotis Lambropoulos, portfolio manager of hedge funds at the Employees Retirement System of Texas, will offer his insights at a panel on emerging hedge fund managers. Lambropoulos’Read More


Avoiding Over-Allocation to Alternative Investments

Nov 6th, 2018 | Filed under: State of the Industry, Featured Post, Private Equity, Newly Added, Asset Allocation, Risk Management, Hedge Funds

A new white paper from New York Life looks at the role of alternatives in portfolio construction and argues that usual risk-return based approaches can underestimate risk and lead to over-allocation to the alternatives. The paper, by Amit Soni, an NYL portfolio manager, proposes a new method “to quantify performanceRead More


Marks on the Market

Oct 29th, 2018 | Filed under: State of the Industry, Newly Added, What About Beta?

Just about 70 years ago, Benjamin Graham wrote the timeless book titled simply The Intelligent Investor. This work and others, along with his distinguished career as an economist and an investor, earned him the title of the “Father of Value Investing.” His fictional investor in this referenced book was aptly named Mr. Market andRead More


Quantifying High Performance Dispersion Risk in Alternatives

Oct 24th, 2018 | Filed under: State of the Industry, Featured Post, Manager Selection, Newly Added, Asset Allocation, Risk Management

By Amit Soni, Portfolio Manager, Strategic Asset Allocation, New York Life Investments Lofty valuations in traditional assets have encouraged investors to explore alternatives. Unfortunately, the lack of a holistic investment framework to incorporate alternatives poses a challenge. Traditional risk-return based approaches, alone, over-allocate to alternatives–a result of underestimation of risksRead More


Self-Organizing Maps for Selecting Hedge Funds

Oct 9th, 2018 | Filed under: State of the Industry, Featured Post, Manager Selection, Newly Added, Asset Allocation, Risk Management, Hedge Funds

A new paper by Claus Huber, of Rodex Risk Advisers, looks at machine learning for risk analysis, working especially from the “self-organizing maps” associated with Finnish Professor Teuvo Kohonen. A SOM is a low-dimensional representation of input space (thinking of it as two dimensional makes the “map” analogy intuitive, andRead More


Goldman Sachs Equity Hedge Fund Report Deep Dives 13Fs

Oct 7th, 2018 | Filed under: State of the Industry, Featured Post, Newly Added, Risk Management, Hedge Funds

Working from a database drawn from 13F filings, authors of a new report from Goldman Sachs Asset Management maintain: (1) hedge funds tend to overweight equities in three markets: information technology, consumer discretionary, healthcare; (2) quarter-on-quarter turnover for equity hedge funds’ portfolios is limited; and (3) a long-only sample portfolioRead More


Hedging or Trading? Why Italian Banks Use Derivatives

Aug 23rd, 2018 | Filed under: State of the Industry, Featured Post, Newly Added, Asset Allocation, Risk Management, Hedge Funds, Commodities & Natural Resources

A recent report by the Bank of Italy looks at why the various banks of Italy use derivatives. Specifically, the central bank of that country wanted to know: is it a matter of hedging? Or is it a matter of keeping a proprietary book? Hedge fund managers and other pursuersRead More


Kurtosis Diagnosis: Don’t get Skewed!

Aug 20th, 2018 | Filed under: State of the Industry, Newly Added, What About Beta?, Risk Management

By Bill Kelly, CEO, CAIA Association The quote “what gets measured gets managed” is oft-times attributed to the author and consultant Peter Drucker. The origin is less significant than its modern-day meaning and, while it is most often used in the context of business management, it ports quite well into the management ofRead More


Using the Variance Risk Premium to Predict Futures Markets

Jul 15th, 2018 | Filed under: Featured Post, Newly Added, Risk Management, Commodities & Natural Resources

A new study of volatility in commodity prices indicates that both the total and the decomposed variance risk premiums of at least certain commodities markets contain information with predictive power. The variance risk premium is the pay-off of the synthetic variance swap contract. Specifically, it’s the difference between the floatingRead More


Neural Networks and EPS Prediction

Jul 12th, 2018 | Filed under: Data Science & AI, State of the Industry, Featured Post, Newly Added, Risk Management

Yes, it sounds a bit like the phrase “jumbo shrimp,” in terms of sense, but a “long short-term memory neural network” is an important recent advance in artificial intelligence research. The term refers to a neural network devised with “forget gates” attached to cells of memory, originally in order toRead More


Why Treasury Professionals are Building Cash Reserves

Mar 25th, 2018 | Filed under: Featured Post, Newly Added, Risk Management

The Association of Finance Professionals recently disclosed, via its Corporate Cash Indicators, that U.S. corporations accumulated more cash in the third quarter of 2017 than had been anticipated. This is consistent with other indications: corporations are concerned about the risks of the present environment and are working to ensure theyRead More


Institutional Investors Wary of Passivity

Mar 1st, 2018 | Filed under: State of the Industry, Featured Post, Newly Added, Asset Allocation, ESG

Natixis’ Center for Investor Insight surveyed 500 institutional investors in the fall of 2017 about long-term objectives, short-term opportunities, and the concomitant pressures. In a new paper, Natixis discusses the Center’s take-a-ways from this survey Geopolitical events are the most worrisome prospect on the minds of the decision makers atRead More


A Rhetorical Oracle?

Feb 26th, 2018 | Filed under: State of the Industry, Newly Added, What About Beta?, Risk Management, Hedge Funds

By Bill Kelly, CEO, CAIA Association Warren Buffett cashed out his bet and the final numbers are in courtesy of the Oracle’s annual shareholder letter. Unfortunately, the most important investment lessons have been completely lost, as the media and the investment sage have mostly used this as an opportunity toRead More


Below the Black: A Review of Risk Reduction Strategies

Sep 13th, 2017 | Filed under: Newly Added, Risk Management, Hedge Funds, Commodities & Natural Resources

Excerpted from the Alternative Investment Analyst Review, Volume 1, Issue 4 The Alternative Investment Analyst Review is the official publication of the CAIA Association. Access to the most current issue is an exclusive benefit of CAIA Membership while archived issues are available to the public in the Perspectives section atRead More


Risk Management Isn’t Just Fund Selection

Apr 27th, 2017 | Filed under: Featured Post, Private Equity, Manager Selection, Newly Added, Risk Management

New Strategies for Risk Management in Private Equity, a new book from Private Equity International, is an anthology of papers on the titular subject. It is edited by Dr. Ivan Herger to offer investors in PE new perspectives on the field. Herger, a managing director at Capital Dynamics, has aRead More


The State of the OTC Index Dividend Swap Market

Feb 9th, 2017 | Filed under: Featured Post, Newly Added, Risk Management, Hedge Funds

In a new article in the Journal of Alternative Investments, Scott Mixon and Esen Onur quantify the over the counter index dividend swap market. Along the way, they provide a good example of the scientific method: positing a relationship, testing it against the data, and then abandoning it when theRead More


Why are Bank Stress Tests like Student/Instructor Evaluations?

Aug 15th, 2016 | Filed under: Featured Post, Newly Added, Risk Management

Two scholars affiliated with Columbia University have contributed to the ongoing discussion of Federal Reserve stress tests and their consequences in an article in the Journal of Alternative Investments. Stress tests have become a big part of the U.S. regulatory scene since 2009, with the creation that year of theRead More


Credit Derivatives in China: A 2014 Presentation Recalled

May 19th, 2016 | Filed under: Newly Added, Risk Management

The People’s Bank of China launched two seemingly important products in 2010: the Credit Risk Mitigation Agreement and the Credit Risk Mitigation Warrant. I refer to them as “seemingly” important because they addressed a large issue in a vast economy, and did so in what seemed to many a commendablyRead More


Risk Management & the Trouble with Capacity-Driven Decisions

Apr 28th, 2016 | Filed under: Featured Post, Newly Added, Risk Management, Commodities & Natural Resources

A recent CAIA member contribution by Kathryn Kaminski, director of investment strategies at Campbell & Co., discusses the quantification of CTA risk management.  It is worth a look, not least because it amounts to a warning about how underperformance can result for the re-jiggering of allocation for capacity constraints. KaminskiRead More


AIMA’s Guide to the Bamboo Bridge of Operations

Feb 15th, 2016 | Filed under: State of the Industry, Access to Alternatives, Manager Selection, Newly Added, Risk Management

How sturdy can a bamboo bridge be? The front page of a new Guide from The Alternative Investment Management Association consists of a photo of a bamboo bridge, apparently on a beach, as seen from below. That is, this is the view of someone on whom the bridge would fall,Read More


Risk Parity: Riding an Unpleasant Arc

Sep 27th, 2015 | Filed under: Asset Allocation

Risk parity may just be one of many strategies that follow a familiar arc, from promising new idea to crowded trade to crowded unwind. If this is so: where in that arc is it now? Read More


The Delusions a Boom Can Bring and the Perils of Chasing Hedge Fund Winners

Aug 28th, 2014 | Filed under: State of the Industry, Asset Allocation, Risk Management, Hedge Funds

For an investor allocating slots in its portfolio to hedge funds, the draw of recent outsized performance can be powerful. Thus, the temptation to chase winners. But two members of the Hedge Fund Strategies Group at Commonfund caution against it. Read More


EDHEC on Time Horizons and Glide Paths

Apr 16th, 2013 | Filed under: Risk Management

Generalized considerations about equity and mean reversion have been institutionalized with the creation of glide path or "life-cycle" funds. but the authors of a new EDHEC paper contend that the glide paths defined by these funds don't represent the optimal approach to portfolio allocation.Read More