End Investors Research Articles

Ranking the Performance of U.S. Dark Venues

Dark venues have become a significant part of the U.S. equity market. More than 50 dark venues exist currently, with a market share of approximately 18% to 22%. Given this presence in the marketplace, institutional traders are perhaps missing a significant portion of the market if they avoid dipping their toes into the world of dark liquidity. Yet with the large number of dark venues that exist, it is extremely difficult to ascertain the amount of natural liquidity present in each venue, as well as the execution quality that each venue provides back to the parent order. Can every dark venue be adding value back to the end investor? <b>TOPICS:</b>Exchanges/markets/clearinghouses, equity portfolio management

Improving Issuer–Investor Communication in U.S. Securitization Transactions

The U.S. securitization market has been addressing many of the lessons learned from the financial crisis in an effort to rebuild the market in a more sustainable and sound fashion. One theme recognized by an increasing number of market participants concerns improving the communication process between issuers and investors in structured finance transactions. As the private ABS market emerged in the mid-1980s and shifted the source of much of consumer finance from banks, as lenders, to capital markets investors, the fundamental relationship between lender and borrower changed, as the authority of the lenders was distributed across multiple investors. Under this model, efficient communication between issuers (i.e., lenders) and investors is important, especially in the context of amendments, waivers, and consents (AWCs). Moreover, the way in which issuers communicate with investors in the securitization market underwent a significant change with the adoption of Rule 144A, as private placement transactions took on many features of the public bond market, including the use of book-entry securities. Issuing securities in book-entry form creates a separation of legal and beneficial ownership of the underlying securities, which has visible implications for investor communication in the ABS market. This article looks at the way that issuers currently communicate with investors in the U.S. ABS market when looking to effectuate AWCs. It also examines some steps the market is taking to improve this process, including a solution that utilizes the distributive power of Bloomberg to deliver AWC notifications directly to end investors.

Anticipated and Repeated Shocks in Liquid Markets

We show that Treasury security prices in the secondary market decrease significantly before subsequent auctions and recover shortly after. This price pattern implies a large issuance cost for the Treasury Department, which is estimated to be between 9 and 18 basis points of the auction size. For example, this cost amounts to over half a billion dollars for issuing Treasury notes alone in 2007. Our results appear to be consistent with the hypothesis of primary dealers’ limited risk-bearing capacity and the imperfect capital mobility of end investors in the Treasury market (e.g., federal agencies, sovereign wealth funds, pension funds, and etc.), highlighting the important role of capital mobility even in the most liquid financial markets.

Taxing the EU Financial Sector: Who Pays?

“The EU, eager to make the financial sector contribute to the cost of the crisis, has been exploring new forms of taxation. However, CFA Institute members believe that the burden of any new tax will ultimately rest on the end investor.”

Growth in the Global Institutional Asset Management Industry: Structure, Conduct, Performance

This article examines the industrial organization and institutional development of the global asset management industry. It identifies the key components of the “buy side” of financial markets in terms of its four principal domains: pension funds, mutual funds, discretionary alternative assets, and insurance companies. It points out that various kinds of financial firms have emerged to perform asset management functions: commercial banks, savings banks, postal savings institutions, savings cooperatives, credit unions, securities firms (full-service firms and various kinds of specialists), insurance companies, finance companies, finance subsidiaries of industrial companies, mutual fund companies, hedge fund financial advisers, and various others. Members of each strategic group compete with each other, as well as with members of other strategic groups. The article addresses two key questions. First, what determines competitive advantage in operating distribution gateways to the end investor? Second, what determines competitive advantage in the asset management process itself?

Who Invested with Madoff? A Flash Analysis of Funds of Funds

Financial fraud in general and Ponzi Schemes in particular continue to both fascinate and plague investors. A Ponzi scheme is often described as a securities fraud in which the promoter makes a false or misleading statement about his investment strategy and money from new investors is used to fund redemptions. When new investors cannot be found to offset investors asking to leave, current investors often are exposed to extreme loss of capital. This article examines whether funds of funds that invested with Madoff have any common characteristics. This question is of particular importance to the end investor, who has historically relied on the FOF industry to provide both manager selection and due diligence services. The results of this study should help investors and their consultants better identify those intermediaries that are less-well-poised to deliver investment management services with respect to hedge funds. The article analyzes a set of FOFs that were or were not invested with Madoff. The results show some relatively weak commonalities in the empirical characteristics of FOFs that invested in Madoff. Unfortunately, the apparent commonalities are insufficient in themselves to accurately and effectively predict which FOFs sought and acquired exposure to Madoff. <b>TOPICS:</b>Real assets/alternative investments/private equity, manager selection, financial crises and financial market history

And Death Shall Have No Dominion: Life Settlements and the Ethic of Profiting from Mortality

And death shall have no dominion: Life settlements and the ethics of profiting from was published on Monday 7 July 2008. The report is the first major independent study of the ethics of investing in US life settlements (also known as traded life policies or TLPs). It analyses the potential benefits of this secondary market for policyholders wishing to sell and for investors seeking to diversify risk but it also raises concerns over current inconsistencies in the regulation of the market. It concludes that there would appear to be no particular ethical issues associated with investing in this asset class that distinguish it from well-established pensions and life market investments, which are also based on mortality projections, provided that products and processes are fully transparent to all parties, including the original policyholder and the end investor, and provided that the privacy of the policyholder is safeguarded.

Hedging Pension Longevity Risk: Practical Capital Markets Solutions

Longevity risk transfer via the capital markets is now a reality. Pension plans and annuity providers can hedge longevity risk with capital markets instruments, reflecting the emergence of a new market that is poised to take off. The key players in this market are hedgers (pension plans and annuity providers), intermediaries (investment banks and broker-dealers) and end investors (ILS funds, hedge funds, endowments, etc.). We argue that the development of liquidity in this market depends on the acceptance of longevity indices and the development of standardized instruments to transfer this risk.Until now, hedgers of longevity risk have almost exclusively approached the subject from the perspective of indemnification (100 percent risk transfer). We propose an alternative approach based on a risk management paradigm that does not require 100 percent risk transfer and is consistent with the way in which other pension-related risks are managed. To this end we present a framework for longevity hedging cantered on standardized indexbased hedges. This framework uses a building-block approach in which standardized hedge building blocks are combined to provide a longevity hedge tailored to the specific demographics, benefit structure and mortality table of any pension plan. The effectiveness of this hedge is maximized by careful calibration of the mix of building blocks and then verified in hedge effectiveness tests.We also discuss customized longevity hedges that will be preferred by some hedgers, who are unconcerned by the lower liquidity and onerous requirements for data disclosure associated with these hedges, and are prepared to pay the additional premium above the cost of a standardized hedge.

MiFID Pre-Trade Transparency Rules

In this article, EDHEC emphasises an important issue that is probably not the expected outcome of MiFID. Even though we recognise that the intentions of the Directive are clearly both to ensure market integrity and protect end investors, we have serious concerns about the results one can expect from the newly introduced requirements related to pre-trade transparency. <b>TOPICS:</b>Exchanges/markets/clearinghouses, statistical methods

Hedging Pension Longevity Risk: Practical Capital Markets Solutions

Longevity risk transfer via the capital markets is now a reality. Pension plans and annuity providers can hedge longevity risk with capital markets instruments, reflecting the emergence of a new market that is poised to take off. The key players in this market are hedgers (pension plans and annuity providers), intermediaries (investment banks and broker-dealers) and end investors (ILS funds, hedge funds, endowments, etc.). We argue that the development of liquidity in this market depends on the acceptance of longevity indices and the development of standardized instruments to transfer this risk.Until now, hedgers of longevity risk have almost exclusively approached the subject from the perspective of indemnification (100 percent risk transfer). We propose an alternative approach based on a risk management paradigm that does not require 100 percent risk transfer and is consistent with the way in which other pension-related risks are managed. To this end we present a framework for longevity hedging cantered on standardized indexbased hedges. This framework uses a building-block approach in which standardized hedge building blocks are combined to provide a longevity hedge tailored to the specific demographics, benefit structure and mortality table of any pension plan. The effectiveness of this hedge is maximized by careful calibration of the mix of building blocks and then verified in hedge effectiveness tests.We also discuss customized longevity hedges that will be preferred by some hedgers, who are unconcerned by the lower liquidity and onerous requirements for data disclosure associated with these hedges, and are prepared to pay the additional premium above the cost of a standardized hedge.