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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

Saudi and Other Gulf Country Bonds to Join JPMorgan Emerging Market Bond Index

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In a boost for Gulf-based debt, JPMorgan is adding their debt compositions to two influential emerging market bond indexes. These emerging market indexes are the most widely tracked among asset managers in the industry. Saudi Arabia, the United Arab Emirates, Bahrain, Kuwait, and Qatar are being added to the J.P. Morgan EMBI Global Diversified Index and the EMBI Global, starting January 31, 2019. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Central Bank of Nigeria Reveals Plan for New National Micro-Finance Bank

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The Central Bank of Nigeria has announced plans for a new national micro-finance bank. The proposed bank will promote small and medium enterprises.

CBN’s governor, Godwin Emefiele, noted that the bank will partner with the Bankers Committee, the Nigeria Incentive-based Risk Sharing System for Agricultural Lending, and the Nigerian Postal Service. Emefiele laid out the vision for the bank in his remarks in Abuja: “The bank will serve as an efficient channel for the disbursement and monitoring of key intervention funds by the CBN.” Nigeria’s micro-finance bank will be focused on meeting financial inclusion targets, promoting financial stability within the country, and fostering widespread economic growth.

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

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Mergermarket Gets Ready to be Sold

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Private equity firm BC Partners hired Goldman Sachs Group Inc. and JPMorgan Chase & Co. to advise on the sales of Acuris. Acuris is a collection of financial news and data sites, which includes Mergermarket, Dealreporter, and Debtwire. In 2017, BC Partners sold around a 30% stake in GIC Private Limited.

Before the rebranding to Acuris, Mergermarket was part of The Financial Times Group until 2013 when it was sold off to BC Partners.

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