Alternative Investments, Investment Management, Hedge Funds, Cryptocurrencies, FinTech, Financial Services Consulting
Wednesday, November 23, 2022
German Regulator Sees Need for Global Crypto Rules - BNN Bloomberg
Sunday, October 9, 2022
The Fed's Political Decision-Making
Is the Fed too eager to raise rates?
https://lnkd.in/e5Vz4fS5
As Mr. Sandhi points out, the Fed is in an unenviable position in its choice of decisions. If it allows the economy to surge ahead, inflation may become institutionalized, while slamming on the breaks can tip the world's economy into a recession of unknowable depth and duration. This decision has many unknowns, including the relative importance of various factors in maintaining inflation at high levels and the unknown impact of a labor market undergoing structural changes. A central question is whether a wage-price cycle is inevitable if the Fed resists a dramatic rise in interest rates. And yet, despite the uncertainties, the Fed is hell-bent on pursuing an all-or-nothing approach. Mr. Sandhi convincingly argues that public opinion may be a decisive factor. In the public's perception, economic pain is preferable to high inflation. However, it remains to be seen if opinion remains the same if the coming recession turns out to be deep and prolonged and only has a moderate impact on inflation.
Saturday, August 13, 2022
Cryptocurrencies Find a Home as an "Asset Class"
https://on.ft.com/3QA2Zxr
Tuesday, July 19, 2022
Correcting a Poor Valuation
Monday, July 18, 2022
FinTech Haphazard Valuations
FinTech Haphazard Valuations
The immense decline in the valuation of FinTech companies, pegged at around 50%, reflects the overly optimistic assessment of the firms' future profitability, especially in the outlook for future revenues. This is a chronic problem in the valuation of newer high-tech companies where little or no performance data exists. The same problem occurred during the dot-com period in the late 1990s.
Friday, July 15, 2022
Investment Strategies for a New Era
https://www.ft.com/content/05d0324f-e216-47ff-973e-c22f660edf22
The era of the Great Exasperation arrives for investorsThis article lays out the changes in the investment climate brought out by recent changes in economics, economic policy, and the difficulty of finding investment strategies that work in the new environment. Many of the trends he identifies are sure to be with us for the medium term. One result is to undermine the tools that investment managers have used for decades and that generated acceptable risk/reward returns. The end of this era undermines many of these tools as well as the underlying premises. Investment professionals may be better off changing investors' expectations than attempting to use old tools in the new environment.
Friday, July 8, 2022
Is the Fed Causing a Recession?
https://www.nytimes.com/2022/07/07/opinion/inflation-recession-the-fed.html?smid=li-share
Krugman argues that inflation fears have been overblown and that there is evidence that inflation is subsiding. His argument is that the Fed is overreacting by signalling that it intends to continue to aggressively raise interest rates raising the prospect of an unnecessary recession. However, this mornings U.S. jobs report shows gain of 372,000 in non-farm payrolls, exceeding economists’ estimates for a 275,000 increase. The unemployment rate remains unchanged at 3.6%. This report may undermine Krugman's analysis and give a green light to the Fed's view that the economy is overheated and inflation may be incorporated into people's expectations, triggering a self-sustaining inflation. The bottom line is a likely hefty rise in interest rates later this week (0.50% and possibly 0.75%). The risk will then shift to to a recessionary outlook. With all the political and economic problems facing the world, a recession in the world's largest economy would be pouring gas on afire. #ezrazask #inflation #economicpolicy #federalreserve #employment #politicaleconomy #recession #stagflation
Thursday, June 30, 2022
Will Central Banks Keep Their Resolve to Raise Interest
https://www.ft.com/content/23c3a3a7-b2da-412c-8050-bdad986fde21
Central Banks and the Fight to Curb InflationEuropean and US central banks have jointly stated that fighting inflation is their top priority and they will follow a high-interest rate and tight monetary policy, partly in recognition that they overshot their long-lasting easy money policy. However, it is easy to state a policy but may be difficult to follow, especially if the economies go into a dive. Based on their past record of accomplishment it is possible that the banks will cave and compromise on their strategy
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Monday, May 16, 2022
Monday, May 9, 2022
Hyped drives High Tech Stocks
https://www.ft.com/content/75f3ed84-62ae-4cb4-947f-bd7e75591481
It turns out that Hype is the missing factor in factor investing. With all the hype given to factor investing is turns out that "Hype" may be the most important overlooked factor. The factors that have received the most attention include Value, Small Size, Low Volatility, High Yield, Quality , and Momentum. However, as this article makes clear, hype, in the form of inclusion in a hyped up acronym (the current unfavorite being FAANG) may explain more of the difference between stocks than these factors combined. It is also noteworthy that Hype is a "behavioral" factor, having no role to play in "rational" economic actor models, giving a clear leg-up for behavioral finance model of economic decision-making. thumb_up Recommend reply Reply share Share flag Report remove cthwaites1 3 HOURS AGO
Wednesday, May 4, 2022
Can Alternative Investments save the 60/40 Portfolio?
Can Alternative Investments save the 60/40 Portfolio?
By Ezra Zask
May 2022
In a 2000 movie, the Perfect Storm, George Clooney portrays the
captain of a fishing boat caught in a storm at sea. Cooney has often
navigated stormy seas as indicated by his greying hair and confident manner. This
time, however, a “perfect storm,” the convergence of three weather fronts, produces
waves so big that they sink the boat despite Clooney’s best efforts.
We are not yet in a perfect storm, but there are indications
that the world may be heading down that road. The indications include the
global pandemic that led to massive unemployment and unprecedented supply
bottlenecks that reduced economic growth and spurred inflation; a flood of new
money and near-zero interest rates engineered by central banks to prevent total
economic shutdown, but which also raised the specter of inflation for the first
time in years. Central banks’ easy money policies and low-interest rates penalized
investors and fed bubbles in stocks and other assets as investors chased after
higher yields. Finally, a global return to economic mercantilism has both stifled
world trade and investment and is partly responsible for increasing political
uncertainty in the world’s largest economies, the U.S. and China.
We have not yet recovered from these waves when the coup de
grace hit: Russia invaded Ukraine in a move that overwhelmed an already shaky
economic environment and tipped it towards higher inflation. Central banks then
reversed a 40-year trend of declining interest rates, threatening to slow economic
growth and to pop asset bubbles in stocks, bonds, and real estate. We have yet
to see how these trends play out both economically and politically.
Old Dependable: The 60/40 Portfolio
Investors have had the wind at their back for decades if they
avoided panic selloffs when markets declined in 1998, 2001, 2008, and 2020. Globalization increased world production and
kept inflation in check. An unprecedented four decade decline in interest rates
began in 1981 after Paul Volcker raised interest rates to fight inflation,
causing large, sustained gains in both the stock and bond markets. Bonds
normally yielded low returns but provided a ballast during volatile times.
Investors and the money managers, supported by theories
provided by economists, converged on an investment paradigm that called for
diversified portfolios comprised of assets non-correlated assets with portfolios with responded to this environment
an investment portfolio that consisted of a mix of stocks and bonds. Popularly
known as a 60/40 portfolio, it consisted of sixty percent stocks and forty
percent bonds. The asset mix varied depending on the investor’s age and risk
tolerance with a larger allocation to stocks for younger and more risk-tolerant
investors, and a larger allocation to bonds as investors aged and became more
conservative.
Investments large and small, from 401k to the largest
pension funds, adopted a variation of the 60/40 portfolio. The 60/40 performed
well providing a compounded annual return of about 9% since 1987 and 10% over
the past decade. Also important to its widespread use is the ease of
implementing the 60/40, which benefited from the growth of low-cost index funds.
The 60/40 was also minimal maintenance: an annual review served to bring the
asset mix back to its original composition.
However, money managers and economists warned that a 60/40
portfolio was optimal only if held for extended periods of time. In “shorter”
periods (which sometimes lasted for years) declining returns and increasing
volatility would result in suboptimal portfolios. The longer one held the 60/40
portfolio, the closer it came to the optimal risk/return level.
Can Alternative Investments Save the 60/40 Portfolio?
Most existing investment portfolios are stuck somewhere along
the 60/40 continuum. However, there is a fierce debate among investors and
money managers about the suitability of the venerable 60/40 in the present investment
environment. The issue is whether the success of the 60/40 portfolio was due to
a combination of factors that no longer exist, especially bull markets in
stocks and bonds, sustained economic growth, low inflation, and a surge in the money supply.
Most future scenarios now project a period of higher
inflation, lower economic growth, and modest returns from stocks and bonds, all
of which will lower the returns of traditional portfolios. One proposed remedy
is to increase portfolio allocation to “alternative investments,” with analysts
recommending up to 20% allocation to alternatives and a similar decrease in the
allocation to fixed income. Advocates of this strategy claim that the inclusion
of alternatives in portfolios will lead to higher returns and lower volatility
than a 60/40 portfolio.
There are potentially fatal problems with this approach,
beginning with the absence of a common definition of “alternative investments,”
a loosely defined group that may include any combination of infrastructure,
private equity, hedge funds, venture capital, managed futures, art, and
antiques commodities and derivative contracts. The list sometimes includes cryptocurrencies
and related instruments. One company offers a portfolio of “alternative
investments comprised of collectibles and culture, Crypto and NFTs, fine
artwork, music rights, specialty real estate, wine and whiskey, and high-end
sneakers.”
However, this lack of a standard definition allows analysts to
manipulate performance data to yield any desired result, which makes comparisons
between different alternative portfolios suspect. Furthermore, several of these
alternatives are illiquid and too small to absorb the massive flow of money
that could come from institutional investors. There is a limit to the amount of
money that the vintage sneakers market can absorb. Finally, access to the best-performing alternative firms is severely limited or impossible for new
investors.
This is not to say that alternative investments do not have
a positive role in investment portfolios. However, investors often use the term
as if its meaning is self-evident when it is anything but that.
Of course, it may be wise to consider the possibility that
we are entering a period of lower returns and that there is a limit to what we
can do without taking on greater risk and/or increased illiquidity. We have had
a good run with the 60/40 portfolio but, like other aspects of life, things tend
to revert to the mean.
Wednesday, April 13, 2022
Hard Times Coming
There is a growing consensus that hard times are coming our way. One "solution" that keeps coming up is to invest in "alternatives." 20% of the asset allocation appears to be a standard recommendation. But isn't that kicking the ball downfield? Most alternatives (notably hedge funds and private equity but increasingly infrastructure, real estate, and SEG investments) underperform stock markets, correlate with each other and equities just when you need them, have a wide dispersion in performance between top and bottom tier firms (and top tier firms are often closed to new investors or have very high minimum investments). Future performance is notoriously difficult to predict based on past performance.
A recurring problem is a distortion faced by many investors and their advisors when evaluating alternative investments a distortion that is nicely explained by behavioral finance. First, there is a barrage of publicity about these firms. We know that investors are more inclined to invest in prominent firms in the news, whether for positive or negative reasons. Too, there is a star quality that the asset classes are given. Finally, there is a tendency to publicize spectacular gains or outsized deals rather than analyze their performance and risk/return ratios. It might be more helpful to admit that markets go through periods of low returns (especially after years of explosive growth) and focus more on avoiding panic reactions to today's headlines or chasing "solutions" that are flawed?
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Tuesday, April 12, 2022
Sunday, April 10, 2022
Amazon Unions: It's About Inequality
https://www.ft.com/content/7b0fa691-ec18-43ec-81ae-172c0e44dc0a
The issue here is not inflation but the distribution of wealth between corporations and the ultra-wealthy on the one hand and workers and the middle class on the other. The fact that workers regained some power in negotiating wage increases (by no means a certainty) is not inflation. That is a canard wheeled out (along with others including projected declines in economic growth of productivity) whenever workers gain some power. However, these imputed links are not backed by empirical evidence. What is backed by overwhelming evidence is that while the U.S. economy has been growing for decades, most of this growth has lined the pockets of corporations -- which means the wealthy as share buyback proliferate -- and the wealthy, notably the ultra-wealthy. While this phenomenon has multiple causes, one of strongest causes has been the reduction in the bargaining power of labor resulting from the decimation of labor unions, itself caused by the promulgation of anti-union legislation in recent decades. The fact that one local union was able to assert some power largely because of local circumstance is taken by many as the harbinger of crippling inflation. I don't think inflation hawks should be worried. This is not the proverbial canary in the coalmine. Labor still faces impossible odds against gaining power on a large scale. And if they do, there is always the tactics used during the Homestead strike.
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