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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

Capital Constellation Backs Middle Market PE Platform

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Capital Constellation is the investment platform owned by the Alaska Permanent Fund Corporation (APFC), RPMI Railpen, and Wafra Inc. on behalf of the Public Institution for Social Security of Kuwait (PIFSS). [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Canadian Pension Giants Could Support Trans Mountain Pipeline Deal

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The British Columbian (B.C.) government and indigenous groups publicly oppose the Trans Mountain Pipeline project over a number of issues, which include environmental concerns (potential pipeline spills) and land protections. The threat of project derailment sent jitters to Houston-based Kinder Morgan, Inc., requiring the company to halt non-essential spending on Trans Mountain Pipeline L.P. Calgary-based Kinder Morgan Canada Limited, which owns the pipeline, is a listed company that is 70% owned by Kinder Morgan and 30% owned by stock market investors (float). Kinder Morgan Canada hired TD Securities to explore options regarding the future of the pipeline.

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

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Goldman Sachs Poised to Name David Solomon as New CEO

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Goldman Sachs is poised to name David M. Solomon, the firm’s president, as its new CEO, replacing Lloyd C. Blankfein. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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