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Hedge Funds, Smart Beta and Volatility Timing are Magically Delicious

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Michael Maduell, President of the Sovereign Wealth Fund Institute

Michael Maduell, President of the Sovereign Wealth Fund Institute

The first three months of 2016 has startled institutional investors and the asset management community. Many name brand hedge funds posted lackluster returns, thus giving less credibility to the name “absolute return”. Billionaire Ken Griffin’s Citadel posted a negative 8% return in its main hedge fund from the start of 2016 through March 11, 2016. A major contributor to Citadel’s recent performance losses were in the company’s Surveyor Capital group, which focuses on a global equity, long/short multi-manager strategy. Surveyor Capital has around 200 employees. In February, Citadel let go around fifteen members of its investment staff, including Jon Venetos who lead Surveyor. Did CalPERS make the right decision to leave hedge funds alone?

Smart Beta Herd

As institutional investors start to feel a bit icky from hedge funds, a number of fee-conscious asset owners float toward smart beta or factor-based strategies. These rules-based strategies often use factors such as volatility, momentum, dividends and other non-market cap measures. Investment experts warn about the crowing effect on factors. Having a herd mentality in smart beta can be dangerous and lead to investment disappointment. The ideal moment to enter a smart beta strategy is contested, but some see when a factor begins to trend higher with a market rally an opportune time to jump in versus buying late into the factor performance cycle. Asset managers are also cashing in on smart beta such as WisdomTree, State Street Global Advisors and BlackRock. BlackRock witnessed US$ 152 billion in new assets flowing to mutual funds and exchange-traded funds in 2015. Not only institutional investors are driving the use of smart beta ETFs, but so called robo-advisors. This could lead to significant excesses in factor strategies.

Yale Professors Investigate Volatility Timing

This leads to my third bit, timing volatility which is a key element of market timing (aka make money). A research study conducted by Yale assistant professors of Finance Alan Moreira and Tyler Muir, called “Volatility Managed Portfolios” discovered that taking less risk when market volatility is high, can result in large positive alphas and boost Sharpe ratios by substantial amounts. The study finds that short-term and long-term investors can benefit from volatility timing and the returns would have a material impact on performance. Some parts of the study are quite obvious, portfolios that cashed out of equities before the global financial crash of 2008 and that came back after volatility dropped post-crisis, made substantial bits of money. Yes, some sovereign funds timed this quite well.

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

Oman SGRF Contemplates $1 Billion Infrastructure Fund

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Oman’s State General Reserve Fund (SGRF) is in discussions on forming a US$ 1 billion infrastructure fund. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Norway’s GPFG Banned from Investing in 9 Companies Over Nuclear Weapons

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The recent false alarm caused by a state employee in Hawaii (who was not terminated and reassigned to a new position), triggering the Emergency Alert System message at 8:07 a.m. caused pandemonium in the state. After decades of failure in diplomacy between the United States and North Korea, the threat of a nuclear missile attack has grown since. The states of Alaska and Hawaii are the closest states to North Korea.

Besides the recent news in the world of nuclear missiles, Norges Bank oversees the management of the country’s sovereign wealth fund. The central bank has moved to ban nine companies from the Government Pension Fund Global. In addition, one company has been placed under observation. The Executive Board of Norges Bank’s decisions on exclusion were made on the basis of recommendations from the Council on Ethics. However, before moving to exclude a company, the central bank may consider other options, such as the exercise of ownership rights. In these instances of companies, the board determined that it was appropriate to use other measures in these cases.

The Council on Ethics’ recommendations to exclude:
Risk of severe environmental damage and serious or systematic violations of human rights
Evergreen Marine Corporation (Taiwan) Ltd
Korea Line Corporation
Precious Shipping PCL
Thoresen Thai Agencies PCL

Unacceptable risk of serious or systematic violations of human rights
Atal SA

Over involvement in the production of nuclear weapons
AECOM
BAE Systems
Fluor Corporation
Huntington Ingalls Industries Inc
Honeywell International Inc (already previously excluded)

Placed Under Observation
Pan Ocean Co. Ltd

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Sistema to Pledge Assets to Help Fund Settlement

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The Russian Direct Investment Fund (RDIF) is helping a settlement situation between two Russian economic powerhouses. In January 2018, Sistema, under a settlement, is mandated to pay Bashneft oil company, which is owned by energy behemoth Rosneft, 100 billion roubles (US$ 1.8 billion) by March 30, 2018.

[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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