Institutional Investor Journals Research Articles

Practical Applications of Exchange-Traded Funds: Sector Performance and DiversificationExchange-Traded Funds: Sector Performance and Diversification Carl F. Luft and John P. Plamondon

ETFs continue to be valuable asset allocation tools, especially for investors looking for specific sector exposures. But how confident can investors be that ETF returns will replicate their chosen sectors? And how broad should the benchmark be? In an interview with Institutional Investor Journals, Carl Luft of DePaul University explains that correlations are actually closer with sector indices that match the S&P 1500 index, versus the more frequently used S&P 500 index. A correction has been made to this PA Report’s link to the original article since the original online publication date of November 22, 2017.

Practical Applications of Time to Stay Home? Global Diversification during the Past 25 Years

Practical Applications Summary A rule of thumb for investors in recent decades has been to invest anywhere from 20% to 40% of assets outside the US. Given the increased level of correlation among stock markets worldwide, does this form of diversification still lead to higher returns In an interview with Institutional Investor Journals about his article, Time to Stay Home? Global Diversification during the Past 25 Years, Stephen Christophe of George Mason University argues that verage US investors might do just as well investing their money closer to home.

Practical Applications of Embracing Downside Risk

Practical Applications Summary Many investors prefer to focus on maximizing their upside participation, since downside hedge protection can be expensive, and cut into long-term returns. But efforts to hedge out an asset’s downside risk can be expected to also reduce its returns. In Embracing Downside Risk, published in The Journal of Alternative Investments , Roni Israelov, Lars N. Nielsen, and daniel Villalon of AQR Capital Management show how downside risk is the primary basis for long-term rewards in equities and other asset classes. The authors use option prices to evaluate returns for investors in both upside and downside risk exposures. Instead of measuring the volatility risk premium as a volatility spread, they measure the return impact for investors following their asymmetric risk preferences. “The bottom-line: It’s the downside that pays. There’s a reason these things are called risk premia,” says Villalon in an interview with Institutional Investor Journals .

Practical Applications of Exchange-Traded Funds: Sector Performance and Diversification

Practical Applications Summary ETFs continue to be valuable asset allocation tools, especially for investors looking for specific sector exposures. But how confident can investors be that ETF returns will replicate their chosen sectors? And how broad should the benchmark be? In an interview with Institutional Investor Journals, Carl Luft of DePaul University explains that correlations are actually closer with sector indices that match the S&P 1500 index, versus the more frequently used S&P 500 index.

Practical Applications of Dividend Swaps and Dividend Futures: State of Play

Practical Applications Summary Asset managers are attracted to bilaterally negotiated OTC derivatives because of their flexibility and customized features, but they are hesitant to trade products with unknown liquidity and opaque pricing. Now, new mandatory regulatory data enables investors to quantify this vast marketplace and to use information about market size as a proxy for risk. Institutional Investor Journals talks with Scott Mixon and Esen Onur of the U.S. Commodity Futures Trading Commission (CFTC), whose article Dividend Swaps and Dividend Futures: State of Play peeks under the hood of the vast OTC index dividend swap market. “We can now look at that data, provide it to the markets, and understand much better what is going on in these previously opaque transactions,” says Mixon.

Practical Applications of The Case for the Cautious Use of Leverage

Practical Applications Summary After the global financial crisis, the investment community changed dramatically and investors went to great lengths to avoid leverage. In The Case for the Cautious Use of Leverage published in the Spring 2017 issue of The Journal of Wealth Management, Wei Ge of Parametric Portfolio Associates shows how leverage can be a useful financial tool when used appropriately. The judicious use of leverage may be especially helpful for institutional investors, especially in today’s environment of diminished growth expectations and ultra-low interest rates. Ge takes an in-depth look at the mechanisms of leverage, and provides examples on how to use leverage effectively without incurring significant unexpected risks. He spoke with Institutional Investor Journals about his work and the implications for investors in the current market environment.

Practical Applications of Currency Crowdedness Generated by Global Bond Funds

Practical Applications Summary “There has been a great deal of research on factor investing in equities, but far less on the fixed income side,” says Gueorgui Konstantinov of LBBW Asset Management. In Currency Crowdedness Generated by Global Bond Funds, he works to rectify that gap, demonstrating that nearly half of the variance in global bond manager returns can be attributed to five currency factors. He also sends a clear practical message: many highly skilled bond managers are not good at active currency management, but rely heavily on these currency factor “betas,” resulting in crowded trades and greater risk. “Investors should keep a close eye on their managers’ style exposures,” cautions Konstantinov. He spoke with Institutional Investor Journals about his research and the original article was published in the Winter 2017 issue of The Journal of Portfolio Management.

Practical Applications of The Bad Arithmetic of Active Management

<h3>Practical Applications Summary</h3> As the debate between active and passive investors continues, it is useful to take a look back at the history of investment performance analysis. In <b><i>The Bad Arithmetic of Active Management</i></b><b>Brian Jacobsen</b> of Wells Fargo Funds Management takes a critical look at a touchstone of received wisdom on the issue of active versus passive investing, <b>William Sharpe’s</b> classic article, <b><i>The Arithmetic of Active Management</i></b>. The problem isn’t that Sharpe miscalculated, but that his categories are misnomers, and the assumptions that underpin them are deeply flawed. So even though the numbers add up, they can’t help you make the right choices between active and passive investments. In this interview with <b>Institutional Investor Journals</b>, Jacobsen explains why and what should be done to improve our analytical frameworks.

Practical Applications of Long Bonds for the Short Run

Practical Applications Summary When interest rates inevitably rise, will there be enough long-term corporate bonds to meet investor demand? In an interview with Institutional Investor Journals , Evan Inglis and Dave Wilson of Nuveen Asset Management explain that, given uncertainties regarding supply, investors should consider boosting allocations to long corporate bonds now. According to their analysis, this advice makes sense whether interest rates rise slowly or quickly from current levels.

Practical Applications of Uncloaking Campbell and Shiller’s CAPE: A Comprehensive Guide to Its Construction and Use

Does Campbell and Shiller’s CAPE accurately predict equity returns? Authors Thomas Philips of BNP Paribas says that “[CAPE] has very sound theoretical underpinnings,” but “its usage ranges from very thoughtful to quite careless.” Not do he or co-author Cenk Ural think any recent enhancements have “substantially improved on the ability of the basic CAPE methodology to describe and forecast returns.” In this conversation with Institutional Investor Journals, they explain how their proposed modifications, such as using accounting-flow variables such as cash flow and revenues in place of earnings and cyclically adjusted earnings can effectively supplement, and even improve, CAPE‘s market return forecasts.

Practical Applications of Addressing the Retirement Savings Crisis in the United States: The Role of Employer-Provided Financial Education

Researchers, policymakers, workers and employers continue to grapple with how to respond to the ongoing retirement crisis in the United States, one that’s likely to hit middle-income earners hardest, according to <b>Barbara Smith</b>, a senior economist in the <b>Office of Retirement Policy at the Social Security Administration</b>. In <b><i>Addressing the Retirement Savings Crisis in the United States: The Role of Employer-Provided Financial Education</i></b>, Smith examines a number of studies that measure the effectiveness of financial education programs. She concludes that there is indeed strong evidence for the effectiveness of workplace-provided financial education. Smith described her work and several key findings in this interview with <b><i>Institutional Investor Journals</i></b>. <b>TOPICS:</b>Retirement, legal/regulatory/public policy, in wealth management

Practical Applications of The Role of ETFs in Active Tax Management

ETFs offer compelling advantages for investors who seek to systematically harvest tax losses, say Paul Bouchey and Tianchuan Li of Parametric Portfolio Associates in this interview with Institutional Investor Journals. With co-author Jean L.P. Brunel, managing principal of Brunel Associates and editor of The Journal of Wealth Management, they extended to ETFs their earlier research on the impact of systematic tax loss harvesting on multi-asset portfolios and derivatives. Using a portfolio of large-cap US stocks and their corresponding sector ETFs, the authors found that although single-security tax management proved more beneficial than a single-ETF or sector-focused-ETF strategy, “ETFs turned out to be almost as valuable a tool as a sophisticated stock-level strategy,“ according to Bouchey. They also happen to be uniquely suited to investors determined to avoid triggering the Internal Revenue Service9s “wash rule.”

Practical Applications of Hedge Fund Illiquidity, Age and Performance

The golden age of hedge funds may be over, according to Haim Mozes and John Launny Steffens of Spring Mountain Capital. Mozes and Steffens offer a critical new insight into how age and size factors affect hedge fund performance, demonstrating how an illiquidity premium is responsible for the deleterious effects of both factors. Mozes, who also teaches at Fordham University, and his Spring Mountain colleague Steffens show that not only do older funds and those experiencing recent inflows underperform their peers, but they also tend to have fewer illiquid investments in their portfolios “The truth is that the illiquidity premium is very hard to measure,” explains Mozes in this interview with Institutional Investor Journals. “I came across an insight from Andrew Lo that I intuitively recognized: the idea that you could estimate the extent to which a hedge fund holds illiquid assets by examining how strongly its returns are correlated,” he explains.

Practical Applications of David and Goliath: Who Wins the Quantitative Battle?

Traditional index funds may not seem to have an advantage over the complex quantitative investment styles employed by hedge funds and other portfolio managers, but the investment approaches share similarities to the ancient story of David and Goliath, says <b>Vanguard Group</b> founder John C. Bogle. In new research published in <b><i>The Journal of Portfolio Management</i></b>, Bogle writes that low-cost index funds are winning against their better-equipped and richer rivals. In an interview with <b>Institutional Investor Journals</b>, Bogle says the implications include the likelihood that many strategic beta funds and other quantitative-based vehicles may fail to outperform simple market-cap weighted index funds over the long term. <b>TOPICS:</b>Mutual funds/passive investing/indexing, real assets/alternative investments/private equity

Practical Applications of Uncloaking Campbell and Shiller’s CAPE: A Comprehensive Guide to Its Construction and Use

Does Campbell and Shiller’s CAPE accurately predict equity returns? Authors <b>Thomas Philips</b> of <b>BNP Paribas</b> says that “[CAPE] has very sound theoretical underpinnings,” but “its usage ranges from very thoughtful to quite careless.” Not do he or co-author <b>Cenk Ural</b> think any recent enhancements have “substantially improved on the ability of the basic CAPE methodology to describe and forecast returns.” In this conversation with <b>Institutional Investor Journals</b>, they explain how their proposed modifications, such as using accounting-flow variables such as cash flow and revenues in place of earnings and cyclically adjusted earnings can effectively supplement, and even improve, CAPE‘s market return forecasts. <b>TOPICS:</b>Performance measurement, real assets/alternative investments/private equity

Practical Applications of The Last Smart Beta Paper You’ll Ever (Have to) Read: Nuggets of Hope beneath the Hype

<b>Overview</b> The recent surge of new products touting smart-beta strategies has sparked a backlash among some skeptical investors who believe the approach may be another fad akin to portable alpha a decade ago. In an interview with <b><i>Institutional Investor Journals</i></b>, <b>Adam Berger</b> and <b>Conor McCarthy</b> of <b>Wellington Management</b> assert that most smart-beta products in the marketplace today will fail to live up to their hype due to inherent flaws, most notably index-like constructions that are poorly matched to investor objectives. Their full research findings appeared in <b>The Journal of Index Investing.</b>

Practical Applications of Interview with Fabio Mercurio

Some of the key areas of innovation in quantitative finance include new approaches to modeling stochastic processes, development of methods for valuing risk factors and expanding historic models to accommodate new and complex market dynamics. In this interview with Institutional Investor Journals, Fabio Mercurio of Bloomberg shares his observations on volatility, wrong-way risk (WWR) and interest rate models, including the LIBOR market model. He will be speaking at Global Derivatives in Budapest.

Practical Applications of A Conversation with Danske Bank’s Jesper Andreasen

The world of quantitative finance is facing new demands on its tools, technologies and talents. Driven by regulatory requirements, banks must take capital requirements and valuation adjustments seriously, but the solutions to many of the new mandates are time consuming and labor intensive. Quantitative talent and technology can help, argues Jesper Andreasen of Danske Bank . In a conversation with Institutional Investor Journals , Andreasen offers his views on the challenges and opportunities created by an increasingly compliance-driven environment. He is speaking on the subject of capital valuation adjustments (KVA) and time series estimation of stochastic models at Global Derivatives .

Practical Applications of Quantum Computing: An Interview with D-Wave Systems CEO Vern Brownell

Quantum computing (QC) is based in the fundamental laws of the universe. Although still in its infancy, this emerging field is showing great promise in benchmark tests on processing speed, and it holds great potential for the financial industry in computationally intensive applications. These include derivatives analysis, valuation of complex instruments and various forms of optimization. Vern Brownell, CEO of D-Wave Systems and an industry leader in the field of quantum computing, will be speaking at Global Derivatives in Budapest. In this pre-conference interview with Institutional Investor Journals, Brownell outlines the current uses for quantum computing and his vision for the role of quantum computers in the finance industry.

Practical Applications of Quantitative Approaches to Wealth Management: An Interview with Artur Sepp

The global financial crisis has had a long-lasting impact on the investment industry, and some wealth management firms have turned to hybrid approaches like algorithmic, or robo-advisory, services to assess risk allocate assets. Artur Sepp of Julius Baer has observed the evolution of the markets closely and in this interview with Institutional Investor Journals he reflects on his research and discusses the value of technology and quantitative solutions to wealth management. Sepp is speaking at Global Derivatives .