Smart Beta as the “Easy” Button
Posted: May 5, 2014 Filed under: ETFs, Finance, Hedge Funds | Tags: alternative investments, ETFs, finance, hedge funds, investments, smart beta Comments Off on Smart Beta as the “Easy” ButtonSmart beta – another hot term these days… It has a nice familiar ring to it, as it sounds like an incremental improvement over the good old CAPM beta! There is something harmless and comforting in the name “smart beta”, especially after the past horrors of exotic derivatives and credit default swaps.
The brilliance of the marketing behind smart beta is akin to the “easy” button at Staples – it makes you think that there is a magic shortcut to solving the challenges of modern investing, almost as simple as pressing the easy button.
Unfortunately, the realities behind the easy button and smart beta investing are not simple at all. Instead of the easy button at Staples there are mind numbing choices of stationery and office products. Similarly, smart beta stands for hundreds, if not thousands, of funds that provide exposure to a multitude of risk factors, either in pure form or bundled with other risk exposures.
The true beauty of smart beta is in its very complexity, as it offers an opportunity for the extremely granular approach of fine-tuning your investment strategies across a multitude of risk dimensions based on your individual objectives. Navigating the smart beta world requires an understanding of all of the options, and it is ultimately your responsibility to pick the exact smart beta products that work specifically for you. And that isn’t easy at all, smart beta or not!
Alternative Investments? There Is No Such Thing!
Posted: April 24, 2014 Filed under: Finance, Hedge Funds | Tags: alternative investments, investment advisors, investments Comments Off on Alternative Investments? There Is No Such Thing!Alternative investments are hot these days… But what are they, exactly? Broadly speaking, “alternative investments” could mean pretty much anything beyond “traditional” investments in stocks, bonds, or cash. These could be futures, options, commodities, currency carry trades, and a multitude of other specific strategies that yield risk-and-return profiles that don’t fall neatly into the framework of the capital asset pricing model (CAPM), and cannot be fully described through their correlations with the S&P 500. I guess, that’s why they are labeled “alternative” investments.
In my mind, the word “alternative” is not that far from “marginal”, and in real life it seems like many people tend to marginalize these investment options. I don’t know why… Perhaps, it is fear of the unknown, as many “alternative” investment strategies may not be easy to comprehend within the modern seven-minute attention span…
On Core and Satellite Approach to Hedge Fund Investing
Posted: April 22, 2014 Filed under: ETFs, Finance, Hedge Funds | Tags: core and satellite, ETFs, finance, hedge funds, investments Comments Off on On Core and Satellite Approach to Hedge Fund InvestingA typical core and satellite portfolio approach involves investing in a “core” passively managed portfolio, and a “satellite” actively managed portfolio. The “core” is typically an index-tracking portfolio whose returns are driven by exposure to specific risk factors. Unfortunately, broad hedge fund index clones, that are currently being sold as “core” risk exposures are not exactly that. As I argued in my previous post, these clones attempt to replicate a mix of “cloneable” and “non-cloneable” funds, i.e. they are in fact “core” and “satellite” portfolios rolled into one product, with no transparency on the exact mix.
Why Clone the Uncloneable? (In Defense of Talented Hedge Fund Managers)
Posted: April 6, 2014 Filed under: Economy, Finance, Hedge Funds | Tags: hedge funds, investments, talent Comments Off on Why Clone the Uncloneable? (In Defense of Talented Hedge Fund Managers)Cloning hedge fund indexes with liquid portfolios is hot these days. Major players, including Goldman Sachs, Morgan Stanley, Barclays, Societe Generale, and BNP Paribas, now offer hedge fund index clones. But guess what? These clones underperform the hedge fund indexes they were designed to replicate! The clone sponsors readily admit that, pointing to many technical reasons as to why that is the case (and a recent study by Ben Dor, Jagannathan, Meier, and Xu does a great job in explaining these). However, the most fundamental question is not usually mentioned at all – I mean, why is cloning expected to work in the first place?
Hedge Funds and ETFs
Posted: March 25, 2014 Filed under: Economy, ETFs, Finance, Hedge Funds | Tags: ETFs, hedge funds, investments Comments Off on Hedge Funds and ETFsHedge funds charge hefty fees. Because they are that good (or so they claim)! They seem to provide good returns that have little in common with the overall stock market return (S&P 500), or U.S. bond market returns. But what is the source of their returns? Is it a stream of new and ever ingenious investment ideas generated by the hard work of a hedge fund manager, or could it be some “secret formula”, discovered long ago, and run by a computer, while the hedge fund manager is now busy golfing and fishing? An example of such a strategy would be just writing out-of-the-money put options on the S&P 500 index.
I, personally, have nothing against paying high fees for truly new investment ideas, generating high returns. For example, SAC’s 50% performance fee sounds like a fair deal for “sure-thing” returns generated by insider tips (oh, if only that strategy was legal)… On the other hand, I do have a problem paying a 20% performance fee as a “royalty” to a computer running a formula discovered a long time ago. However, if nobody else on the market offers returns based on the same (or similar) formula, then I am stuck with that hedge fund. And that is exactly what the situation was until recently.
The Future of Innovation
Posted: November 30, 2013 Filed under: Economy, Finance, Politics, Progress | Tags: innovation, progress Comments Off on The Future of InnovationWhat better resembles the future of innovation – this or that?
Innovation is the ultimate driver of economic growth. Innovations big and small are essential for us to be better off tomorrow than we are today. However, it is also critical to sort out good innovations from wasteful ones. Good innovations then have to be adequately financed and nurtured in order to develop to their full potential. Financing potential breakthroughs in technologies “like we’ve never seen before” requires expertise, vision, and guts, as most radically new ideas may initially sound like “crazy talk”.
Finance and the Purpose in Life
Posted: April 8, 2013 Filed under: Economy, Finance | Tags: finance, purpose in life Comments Off on Finance and the Purpose in LifeIt is no secret that Main Street suspects that Wall Street high finance provides little meaningful contribution to society. Recent history suggests to a non-financial person that finance may in fact be taking rather than contributing. This opinion is expressed everywhere from Oliver Stone’s original “Wall Street” to the more recent Greg Smith’s “Why I am Leaving Goldman Sachs”. Even people in the finance industry have this nagging feeling about the purpose of life, as Matt Levine pointed out in his comment on Greg Smith’s article:
Smith is hardly the first banker to worry about whether his work makes the world a better place. Working at an investment bank involves trading off those negatives – stress, hours and a nagging sense of unfulfilled purpose – against the positive aspects of the job, which can be loosely summarized as “huge paychecks.”
Effective Investments
Posted: March 28, 2013 Filed under: Economy, Finance, Politics | Tags: economy, investments, politics Comments Off on Effective InvestmentsThe most effective investments … are investments in politics.
– Boris Berezovsky
Am I seriously quoting the late Russian oligarch about investments in politics? After all, Berezovky brazenly manipulated political outcomes in Russia for personal gain. Am I implying that investors do the same? Not exactly… While it is certainly not possible for a typical investor to manipulate the political landscape on such a grand scale, it is possible to achieve superior returns by taking the time to understand politics in order to anticipate developments that affect all financial markets.
True Economic Growth vs. a Pyramid Scheme
Posted: December 17, 2012 Filed under: Economy, Finance, Politics | Tags: economy, finance, government policy, pyramid scheme Comments Off on True Economic Growth vs. a Pyramid SchemeOnce you start thinking about economic growth, it’s hard to think about anything else.
– Robert E. Lucas
Q: What is the difference between maintaining sound fiscal policy and running a pyramid scheme with respect to government debt?
A: It all depends on the economy’s predicted growth rate.
What is economic growth, where does it come from, and how do we measure it? These are simple questions, but it is fundamentally important to get them right in order to understand what is ahead for the U.S. economy, and how its growth relates to government fiscal policy. Here I would like to take a look at how we measure economic growth, and argue that sometimes true economic growth may not be what it seems, at least in the short term.
On Social Norms, Rules, and Regulations
Posted: February 21, 2012 Filed under: Progress, Society | Tags: discovery, five monkeys, paradigm shift Comments Off on On Social Norms, Rules, and RegulationsAll great truths begin as blasphemies.
— George Bernard Shaw
Let me start with the proverbial “Five Monkeys” story.
Five Monkeys
Start with a cage of five monkeys. Inside the cage, there is a banana hanging from the ceiling and a ladder placed under it. Before long, a monkey would go to the ladder and start to climb towards the banana. As soon as he touches the ladder, he and all of the other monkeys are sprayed with ice-cold water.
After a while, another monkey makes an attempt to reach the banana. Again, as soon as he touches the stairs, all the monkeys are sprayed with ice-cold water. This is repeated again and again until the monkeys learned their lesson: climbing results in ice-cold water for everyone, so no one climbs the ladder.
Mental Kaleidoscope 