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Why Sovereign Funds are Unfazed by Latest Market Swings

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It has been hammered into the global collective consciousness that sovereign wealth funds are long-term institutional investors and contrarian stylistically at many instances. The latest U.S. stock market drop has put some investors at an impasse. Will the fall continue? How important is market timing?

The deleveraging of select institutional investors, such as systematic trading allocators, likely contributed to the stock market drop on the fifth of February. The plausible technical-driven sell-off has long-term pensions and sovereign funds licking their lips for the buy the dip moment. The California Public Employees’ Retirement System (CalPERS) months ago signaled they were increasing public equities and reducing the amount of private equity managers being used.

There is legitimate anxiety of higher interest rates with a new Federal Reserve chairman – Jerome Powell – among traders and investors. The Federal Reserve being cautious on triggering a U.S. recession is undoubtedly looking at consumer sentiment and production indicators, before the signal or vote on rate decisions for the near future. The slowdown in quantitative easing (QE) policies have already impacted global markets, causing a rise in bond yields across markets. Risk-seeking traders playing the short-term volatility game felt the heat in early February, after the massive single-day decline in stock markets. Despite sovereign funds having a pool of over US$ 7 trillion in assets, retail investors have a major role in the ups and downs of the U.S. stock market. Wall Street often markets exchange-traded products and mutual funds off of stock-trading websites and financial news sites. Many retail investors dabble in stocks and exchange-traded products (ETP).

VIX Product Collapse

The Monday mayhem of February 5, 2018, jolted investors, both retail and institutional money. Two exchange-traded products tied to the Chicago Board Options Exchange (CBOE) volatility index – or VIX – collapsed in afterhours futures trading on Monday – February 5, losing 95% of their value after the popular indicator of investor anxiety doubled in response to the worst day for markets since the summer of 2011. CBOE Global Markets paid the price later on the sixth; as of 4:00 p.m. EST that day, CBOE’s stock was trading down 10.42% at US$ 116.93 a share.

The VelocityShares Daily Inverse VIX Short-Term ETN (XIV) and ProShares Short VIX Short-Term Futures ETF (SVXY) – both issued by Credit Suisse – provide single-day returns on the inverse of the VIX, and have been immensely popular over the past year with traders banking on markets remaining mild. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

Mubadala and SAMI Forge Ties to Explore Areas of Collaboration

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Mubadala Investment Company and Saudi Arabia Military Industries Company (SAMI), which is a defence company owned by Saudi Arabia’s Public Investment Fund (PIF), agreed to a deal to partner and co-invest in defense manufacturing. This partnership grows defence ties between Saudi Arabia and the United Arab Emirates.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Cryptocurrencies Creep into the Middle East

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Banking behemoth J.P. Morgan Chase disclosed its own digital currency called JPM Coin. The digital token will be used to settle payments between clients. JPM Coin will be backed by physical U.S. dollars and be based off Quorum. Quorum is J.P. Morgan’s private Ethereum-based chain. JPM Coin plans to compete with Ripple, which created XRP, another digital currency that is used for settlements. Ripple’s main target market is cross-border payments and remittances.

The Central Bank of the United Arab Emirates and the Saudi Arabian Monetary Authority have unveiled their plans for Aber, an interbank digital currency. Both banks have indicated that Aber will be limited to financial settlements using distributed ledger technologies. It will be rolled out on a probational basis, and used by select banks within the two countries. A date for rollout has not yet been declared. A joint statement hinted at a broader application of the currency in the days ahead. If “no technical obstacles are encountered, economic and legal requirements for future uses will be considered.”‏ Blockchains and Distributed Ledgers technologies will be employed. The plan is for ‘Proof-of-Concept’ testing, which involves studying and fully comprehending the ways modern technologies can achieve practical applications. The digital currency has the potential to become a reserve system for central payments.

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CPPIB Inks Partnership Vehicle with La Française and its Shareholder CMNE

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La Française and Canada Pension Plan Investment Board (CPPIB) formed a strategic partnership for the launch of a real estate investment and development vehicle: Société Foncière et Immobilière du Grand Paris. The joint venture between CPPIB (80%) and Caisse Fédérale du Crédit Mutuel Nord Europe (CMNE) (20%), La Française’s shareholder, will invest in major real estate projects linked to the Grand Paris infrastructure in the Greater Paris area. The parties will initially allocate €387.5 million in equity to the venture. The partnership will target regeneration and infrastructure-led investments.[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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