Risk Metrics and Measurement
Breaking the Fourth Wall of ESG
Mar 14th, 2021 | Filed under: Newly Added, Socially responsible investing, What about beta?, Risk Metrics and Measurement, ESG, Climate change
By Aaron Filbeck, CFA, CAIA, CIPM, FDP, Director of Global Content Development at CAIA Association “In a real magic act, everything is fake.” – Wanda Maximoff, WandaVision (2021) A harmless phrase used in the latest addition to the Marvel Cinematic Universe, WandaVision. The protagonist, Wanda Maximoff, has created a false reality byRead More
Strategic Note: Improved Smile-Implied Hedging
Jan 21st, 2021 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Risk management, Risk Metrics and Measurement, Risk Management Strategies & Processes, Finance & EconomicsA recent paper by two Canadian scholars looks to improve on the art of smile-implied option replication. Pascal Francois, of the HEC Montreal Department of Finance, and Lars Stentoft, of the University of Western Ontario, Department of Economics, begins with the observation that options can be dynamically replicated using model-freeRead More
An ‘Alternative’ Safe-Haven
Jul 26th, 2020 | Filed under: Performance, Analytics & Metrics, Newly Added, Risk management, Asset allocation, Asset Allocation Models, Risk Metrics and Measurement, Risk Management Strategies & Processes, Allocating to Alts
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
Variance Risk Premium: What Premium?
Jun 25th, 2020 | Filed under: Newly Added, Alpha Strategies, Risk management, Risk Metrics and Measurement, Alternative Investments in Context, Risk Management Strategies & ProcessesBy Nicolas Rabener of FactorResearch (@FactorResearch) INTRODUCTION Investing is akin to fighting in the forever war. There are long periods of peace and prosperity, but investors are frequently drawn into short-term combat, extended battles, and multi-year wars. And the cycle repeats over and over. For some of the foot soldiers,Read More
CAIA Alternative Viewpoint: Risk Parity
Jan 23rd, 2020 | Filed under: Newly Added, Risk management, CAIA Alternative Viewpoints, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & ProcessesMean variance optimization (MVO) is a simple, yet well-regarded asset allocation technique designed to create a portfolio that maximizes it’s expected level of return for a given level of standard deviation. Many institutions construct diversified portfolios using this simple technique, attempting to maximize their risk-adjusted returns. While popular with manyRead More
An Alternative View of Manager Selection Risk
Jan 16th, 2020 | Filed under: Performance, Analytics & Metrics, Newly Added, Institutional Investing, Risk management, Asset allocation, Benchmarking & Performance Attribution, Asset Allocation Models, Other Issues in Private Investments, Risk Metrics and Measurement, The Alts Industry, Institutional Asset Management, Risk Management Strategies & Processes, Hedge Funds, Private Investments, Risk Management & Operations, Allocating to AltsBy Aaron Filbeck, CFA, CAIA, CIPM & Hossein Kazemi, PhD, CFA, CAIA Association & CISDM This is a summary of the editor’s letter originally published in the Volume 8, Issue 4 of the Alternative Investment Analyst Review, a journal published by CAIA Association. The Problem with Studies Many studies onRead More
How to Improve Momentum Risk Management
Nov 12th, 2019 | Filed under: Hedge Fund Strategies, Equity Hedge Funds, Newly Added, Risk management, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & Processes, Hedge FundsMatthew X. Hanauer and Steffen Windmueller, two scholars affiliated with the Technical University of Munich, compare the performance of three risk management approaches applicable to the momentum strategy. Their new paper also explores the risk management techniques available for hedge fund managers and others who pursue a momentum strategy. ARead More
Low Vol vs Option-Based Strategies
Oct 6th, 2019 | Filed under: Newly Added, Risk management, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & ProcessesBy 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
Anticipating Buyout Deals: A Prospective New Model on an Old Strategy
Aug 22nd, 2019 | Filed under: Hedge Fund Strategies, Equity Hedge Funds, Newly Added, Risk management, Event-Driven Hedge Funds, Risk Metrics and Measurement, Smart Beta, The Alts Industry, Risk Management Strategies & Processes, Hedge Funds, Risk Management & OperationsMilind Sharma and Aravind Ganesan have developed what they call the QMIT Leveraged Buyout Model—a trading strategy—based on anticipating announcements of LBOs based on QMIT’s factor library. Sharma is the CEO of QMIT, QuantZ Machine Intelligence Technologies. QMIT is itself a spin-off from QuantZ Capital, which is a stat arbRead More
Active Risk Budgeting Gets Consistent Alpha
Jul 28th, 2019 | Filed under: CAPM / Alpha Theory, Financial Economics Theory, Newly Added, Risk management, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & Processes, Risk Management & Operations, Finance & EconomicsA new paper takes an experimental look at “Active Risk Budgeting,” a method of portfolio construction that looks to build upon older and sometimes passive risk budgeting approaches, adding enough active management to allow the risk budget to change over time. For example, an institution might want its risk budgetRead More
Fixing the Sharpe Ratio: A Machine Learning Approach
Jun 16th, 2019 | Filed under: Performance, Analytics & Metrics, Newly Added, Risk management, Benchmarking & Performance Attribution, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & Processes, Hedge FundsThe 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
Accommodating Ambiguity Aversion in Portfolio Modeling
May 14th, 2019 | Filed under: Performance, Analytics & Metrics, Newly Added, Risk management, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & ProcessesBy standard definition, “ambiguity aversion” is the preference for known risks over unknown risks, the known unknowns over the unknown unknowns. A recent paper discusses the portfolio-level consequences of this aversion. The paper, written by Valery Polkovnichenko and Hui (Grace) Wang, explains that for an ambiguity-neutral investor, “adding active portfolio withRead More
Algorithms Moving into the Bond Markets
Mar 17th, 2019 | Filed under: Algorithmic and high-frequency trading, Newly Added, Risk management, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & ProcessesAlgorithmic trading may fairly be said to have conquered the public equities world, although there are still pockets of resistance and related controversies. The robots have now turned their attention to the bond markets. Bond markets are different from stock markets in a lot of ways, and many of theseRead More
Modeling the Volatility of Crypto Exchange Rates
Jan 31st, 2019 | Filed under: Newly Added, Regulatory Environment, Digital currencies, Risk Metrics and Measurement, The Alts Industry, Emerging Alternative Investments, Risk Management & Operations, Other Topics in AltsGARCH (Generalized Autoregressive Conditional Heteroskedasticity) models are very useful for estimating the volatility for a lot of more traditional assets (stocks and bonds) and their indices, which is why they’ve been around since the 1980s. But when they’re used for Bitcoin, Ethereum, Ripple, and Litecoin they yield incorrect predictions forRead More
Assessing Risk Measurement for a Portfolio of Hedge Funds
Jan 27th, 2019 | Filed under: Hedge Fund Industry Trends, Hedge Fund Operations and Risk Management, Hedge Fund Strategies, Newly Added, Risk management, Technology, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & Processes, Hedge Funds, Structure of the Hedge Funds Industry, Risk Management & OperationsTwo 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
Leveraging and Enhancing Catastrophe Models
Dec 27th, 2018 | Filed under: Newly Added, Risk management, Operations, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & Processes, Emerging Alternative Investments, Risk Management & Operations, Other Topics in AltsI write these words soon after reading the news from Sundra Strait, Indonesia. In recent days, the eruption and collapse of a volcano there has set off a tsunami that in turn has devastated the coastal regions of Banten and Lampung, also in Indonesia. Much time may have to passRead More
Avoiding Over-Allocation to Alternative Investments
Nov 6th, 2018 | Filed under: Private Equity, Newly Added, Institutional Investing, Risk management, Asset allocation, Asset Allocation Models, Risk Metrics and Measurement, The Alts Industry, Institutional Asset Management, Risk Management Strategies & Processes, Hedge Funds, Private InvestmentsA 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
Quantifying High Performance Dispersion Risk in Alternatives
Oct 24th, 2018 | Filed under: Performance, Analytics & Metrics, Alpha & Beta, Newly Added, Institutional Investing, Risk management, Asset allocation, Asset Allocation Models, Risk Metrics and Measurement, The Alts Industry, Institutional Asset Management, Risk Management Strategies & Processes, Risk Management & Operations, Allocating to AltsBy 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
A Brief History of Asset Allocation
Oct 16th, 2018 | Filed under: CAPM / Alpha Theory, Algorithmic and high-frequency trading, Hedge Fund Strategies, Financial Economics Theory, Newly Added, Risk management, Crowdfunding, Risk Metrics and Measurement, Business News, The Alts Industry, Risk Management Strategies & Processes, Hedge Funds, Emerging Alternative Investments, Finance & Economics, Other Topics in AltsGlassbridge has put out an ambitious white paper about the “evolution of asset allocation across the investment management industry,” one that begins with the basics of the Capital Asset Pricing Model and ends with quantitative analysis and crowdsourcing. The premise is that new strategies, and new ranges of data, areRead More
Cracking the Illiquidity Code
Sep 26th, 2018 | Filed under: Performance, Analytics & Metrics, Private Equity, Newly Added, Benchmarking & Performance Attribution, Equity Types of Private Equity, Other Issues in Private Investments, Risk Metrics and Measurement, The Alts Industry, Private InvestmentsBy Tom Keck, Partner & Head of Research; Lisa Larsson, Vice President, Research Researchers at StepStone Group, a global private markets firm, recently released a white paper that puts the illiquidity of private equity into perspective. A fund’s life they reckon is too coarse a measure; the picture comes into focusRead More
Kurtosis Diagnosis: Don’t get Skewed!
Aug 20th, 2018 | Filed under: Newly Added, Risk management, What about beta?, Risk Metrics and Measurement, The Alts Industry, Risk Management Strategies & ProcessesBy 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: Commodities, Hard metals, Newly Added, Risk management, oil, Risk Metrics and Measurement, Commodities: Examples, Energy, Risk Management Strategies & Processes, Gold, CommoditiesA 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
Greenwich Associates on Exchange-Listed Options
May 22nd, 2018 | Filed under: Newly Added, Risk management, Risk Metrics and Measurement, Risk Management Strategies & Processes, Risk Management & OperationsGreenwich Associates has produced research, commissioned by the Options Industry Council, about the way institutional investors understand exchange listed options. Greenwich concludes that underperforming institutions, including pension plans and endowments, “should be considering investments in options strategies as a means to improve risk-adjusted returns.” Institutions not currently doing so mayRead More
Options-based Strategies and their Pay-offs
Apr 10th, 2018 | Filed under: Financial Economics Theory, Newly Added, Behavioral finance, Risk Metrics and Measurement, Risk Management & Operations, Finance & EconomicsRoberto Obregon, of the Meketa Investment Group, has written a paper (available at SSRN) on the use of options-based equity strategies. Obregon is the author of a number of scholarly papers on alternative strategies, including one last fall on global macro, which he co-authored with Willam Dana. In his optionsRead More
Why Treasury Professionals are Building Cash Reserves
Mar 25th, 2018 | Filed under: Newly Added, Risk management, Risk Metrics and Measurement, Risk Management Strategies & Processes, Risk Management & OperationsThe 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
Reducing Dependence on (L)IBOR
Mar 15th, 2018 | Filed under: Newly Added, The Global Economy & Currencies, Risk Metrics and Measurement, Risk Management & Operations, Finance & EconomicsA creation of the mid-1980s, the London Interbank Offered rate (LIBOR) became immensely influential over the three decades that followed. It became a reference rate for both finance and commerce for the rate of nearly risk-free interest, and in the process it spawned other IBORs, including EURIBOR and Japan’s TIBOR.Read More
News from AIMA: Performance and UK Regs
Feb 27th, 2018 | Filed under: Newly Added, Risk management, Risk Metrics and Measurement, Risk Management Strategies & Processes, Hedge Funds, Risk Management & OperationsNew research by the Alternative Investment Management Association (AIMA), in collaboration with Preqin, indicates that hedge funds have produced “more consistent and steadier returns than equities or bonds over both the short term and the long term.” The study employed four scales of time: one year, three, five, and 10Read More
A Rhetorical Oracle?
Feb 26th, 2018 | Filed under: Hedge Fund Industry Trends, Newly Added, What about beta?, Risk Metrics and Measurement, Fees, Structure of the Hedge Funds IndustryBy 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
The Unrecognized Risks of Short Vol Strategies
Feb 25th, 2018 | Filed under: Financial Economics Theory, Newly Added, Risk Metrics and Measurement, Risk Management & Operations, Finance & EconomicsVineer Bhansali and Lawrence Harris have written a scholarly paper on what they call the “extraordinary growth of short volatility strategies” since late 2010. A lot of people and institutions seem to have come to the conclusion that spiking volatility is just that. A “spike” on a chart is definitionallyRead More
Due Diligence Requires Deep Dives into Data
Nov 7th, 2017 | Filed under: Due Diligence Process, Newly Added, Risk Metrics and Measurement, Private Investments, Risk Management & OperationsThe data and analysis provider eVestment has issued a new white paper on “enhancing private equity manager selection with deeper data.” PE funds below the top quartile have not materially outperformed the public markets as a matter of history. So for an institutional investor, earning alpha is in large measureRead More
Below the Black: A Review of Risk Reduction Strategies
Sep 13th, 2017 | Filed under: Commodities, Hedge Fund Strategies, Investing in Commodities, Newly Added, Risk management, Risk Metrics and Measurement, Macro and Managed Futures Funds, Risk Management Strategies & Processes, Hedge Funds, Commodities, Risk Management & OperationsExcerpted 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