This article investigates the determinants of Bitcoin returns. The authors consider a comprehensive set of information variables under five categories: macroeconomics, blockchain technology, other assets, stress level, and investor sentiment. Their approach toward this large dataset is built upon dimension-reduction models such as Backward Elimination, least absolute shrinkage and selection operator (LASSO), principal component regression (PCR), and three-pass regression filter (3PRF). The empirical results show that blockchain technology, stress level, and investor sentiment have positive, negative, and positive predicting power on Bitcoin returns, respectively. Macroeconomic variables exhibit insignificant impacts on Bitcoin returns. Other asset variables show little predicting power until 2019, but some become a significant predictor during the COVID-19 pandemic. Overall, the authors caution against using Bitcoin as a risk-hedging device in financial portfolios. They also find that, consistent with other financial assets such as equities, Bitcoin shows increased predictability with a longer return horizon. Due to their empirical results, they also advocate the use of 3PRF; relative to other dimension-reduction methods under consideration, they observe superior performance of 3PRF in predicting both the level and the direction of future Bitcoin returns across all return horizons.
{"title":"What Information Variables Predict Bitcoin Returns? A Dimension-Reduction Approach","authors":"S. Kang, Yao Xie, Jialin Zhao","doi":"10.3905/jai.2023.1.187","DOIUrl":"https://doi.org/10.3905/jai.2023.1.187","url":null,"abstract":"This article investigates the determinants of Bitcoin returns. The authors consider a comprehensive set of information variables under five categories: macroeconomics, blockchain technology, other assets, stress level, and investor sentiment. Their approach toward this large dataset is built upon dimension-reduction models such as Backward Elimination, least absolute shrinkage and selection operator (LASSO), principal component regression (PCR), and three-pass regression filter (3PRF). The empirical results show that blockchain technology, stress level, and investor sentiment have positive, negative, and positive predicting power on Bitcoin returns, respectively. Macroeconomic variables exhibit insignificant impacts on Bitcoin returns. Other asset variables show little predicting power until 2019, but some become a significant predictor during the COVID-19 pandemic. Overall, the authors caution against using Bitcoin as a risk-hedging device in financial portfolios. They also find that, consistent with other financial assets such as equities, Bitcoin shows increased predictability with a longer return horizon. Due to their empirical results, they also advocate the use of 3PRF; relative to other dimension-reduction methods under consideration, they observe superior performance of 3PRF in predicting both the level and the direction of future Bitcoin returns across all return horizons.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2023-03-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45711629","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
CTAs have generated strong returns in 2022 and regained investors’ interest in improving portfolio diversification. However, given their nature of being simultaneously long and short multiple asset classes and constantly changing their portfolios, they often are viewed as black-box strategies. We show that CTA performance can be approximately replicated top-down by using just four asset classes, as well as by creating a CTA bottom-up utilizing 59 indexes. Neither process is complicated and both increase transparency on the investment process and portfolio construction of CTAs, which may help investors become more comfortable with this investment strategy.
{"title":"Trend Following Made Easy: How to Create a CTA from Scratch","authors":"Nicolas Rabener","doi":"10.3905/jai.2023.1.186","DOIUrl":"https://doi.org/10.3905/jai.2023.1.186","url":null,"abstract":"CTAs have generated strong returns in 2022 and regained investors’ interest in improving portfolio diversification. However, given their nature of being simultaneously long and short multiple asset classes and constantly changing their portfolios, they often are viewed as black-box strategies. We show that CTA performance can be approximately replicated top-down by using just four asset classes, as well as by creating a CTA bottom-up utilizing 59 indexes. Neither process is complicated and both increase transparency on the investment process and portfolio construction of CTAs, which may help investors become more comfortable with this investment strategy.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2023-03-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47735093","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article explores the investment impact and performance of a unique group of angel investors: those featured on the television show Shark Tank. It explores the relationship between the investors’ individual characteristics such as experience, reputation, and network, with their investments’ performance and attributes. The authors find evidence that investor and deal characteristics matter for predicting whether an investor is more or less likely to make offers and close deals. However, on average, Sharks do not have the ability to select outperforming companies, where investment performance is measured by the survival and website traffic of the start-up companies. They found the reputational impact of Shark Tank as a venue is significant. While these Shark investors are not typical of the vast majority of angel investors, the authors identify fundamental insights that may be of value to understanding the much larger and less famous angel investor community and the entrepreneurial firms they finance.
{"title":"Exploring Angel Investor Impact: Diving into the Shark Tank!","authors":"M. Cannice, Ludwig B. Chincarini, Ryan M. Leary","doi":"10.3905/jai.2023.1.184","DOIUrl":"https://doi.org/10.3905/jai.2023.1.184","url":null,"abstract":"This article explores the investment impact and performance of a unique group of angel investors: those featured on the television show Shark Tank. It explores the relationship between the investors’ individual characteristics such as experience, reputation, and network, with their investments’ performance and attributes. The authors find evidence that investor and deal characteristics matter for predicting whether an investor is more or less likely to make offers and close deals. However, on average, Sharks do not have the ability to select outperforming companies, where investment performance is measured by the survival and website traffic of the start-up companies. They found the reputational impact of Shark Tank as a venue is significant. While these Shark investors are not typical of the vast majority of angel investors, the authors identify fundamental insights that may be of value to understanding the much larger and less famous angel investor community and the entrepreneurial firms they finance.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2023-02-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46508695","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Private equity (PE) funds are growing, beginning to take the lead in capital markets. In conjunction with this growth, secondary markets for PE fund ownership interests also have grown. Recent research investigates the valuation discount that sellers of PE fund interests incur in secondary markets, and suggests this discount is driven entirely by the illiquidity inherent in PE. This article describes how the legal structure of PE funds, instrumental to funds’ existence and operations but largely ignored in prior research, can impose a tax discount in addition to an illiquidity discount in the secondary market. Thus, it extends this new and important stream of research by highlighting that illiquidity may be only one attribute driving PE fund secondary market discounts and that after-tax, rather than pretax returns, warrant consideration in these markets.
{"title":"Private Equity Fund Pricing in Secondary Markets: Effects of Taxes and Fund Structure","authors":"Paul J. Mason, Steven Utke","doi":"10.3905/jai.2023.1.182","DOIUrl":"https://doi.org/10.3905/jai.2023.1.182","url":null,"abstract":"Private equity (PE) funds are growing, beginning to take the lead in capital markets. In conjunction with this growth, secondary markets for PE fund ownership interests also have grown. Recent research investigates the valuation discount that sellers of PE fund interests incur in secondary markets, and suggests this discount is driven entirely by the illiquidity inherent in PE. This article describes how the legal structure of PE funds, instrumental to funds’ existence and operations but largely ignored in prior research, can impose a tax discount in addition to an illiquidity discount in the secondary market. Thus, it extends this new and important stream of research by highlighting that illiquidity may be only one attribute driving PE fund secondary market discounts and that after-tax, rather than pretax returns, warrant consideration in these markets.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2023-02-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47506646","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-12-31DOI: 10.3905/jai.2022.25.3.001
Hossein Kazemi
{"title":"Editor’s Letter","authors":"Hossein Kazemi","doi":"10.3905/jai.2022.25.3.001","DOIUrl":"https://doi.org/10.3905/jai.2022.25.3.001","url":null,"abstract":"","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47667459","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Levered exchange-traded products have been criticized as offering inferior long-term returns for two reasons: their higher volatility and, apparently, the belief that volatility diminishes long-term expected returns. Following the approach of Pessina and Whaley (2021) we analyze simulated returns of levered and inverse exchange traded funds (ETFs) and conclude that their expected long-run values are not diminished by volatility. We identity natural counterparties to the rebalancing trades of levered exchange traded funds (LETFs) and analyze the impact of autocorrelation on daily-rebalanced LETF returns, theoretically and empirically, for both LETFs and their counterparties. The results indicate that negative (positive) autocorrelation in daily returns will cause LETFs to perform relatively poorly (well) and their counterparties to perform relatively well (poorly). Accordingly, the extent to which levered and inverse ETFs have legitimate hedging applications and reasonable risk-adjusted returns (setting aside trading costs and fund expenses) depends on the extent to which the underlying returns are consistent with weak-form market efficiency.
{"title":"Levered and Inverse Exchange-Traded Products: Evidence from Simulations","authors":"D. Chambers, Stephen M. Horan","doi":"10.3905/jai.2022.1.179","DOIUrl":"https://doi.org/10.3905/jai.2022.1.179","url":null,"abstract":"Levered exchange-traded products have been criticized as offering inferior long-term returns for two reasons: their higher volatility and, apparently, the belief that volatility diminishes long-term expected returns. Following the approach of Pessina and Whaley (2021) we analyze simulated returns of levered and inverse exchange traded funds (ETFs) and conclude that their expected long-run values are not diminished by volatility. We identity natural counterparties to the rebalancing trades of levered exchange traded funds (LETFs) and analyze the impact of autocorrelation on daily-rebalanced LETF returns, theoretically and empirically, for both LETFs and their counterparties. The results indicate that negative (positive) autocorrelation in daily returns will cause LETFs to perform relatively poorly (well) and their counterparties to perform relatively well (poorly). Accordingly, the extent to which levered and inverse ETFs have legitimate hedging applications and reasonable risk-adjusted returns (setting aside trading costs and fund expenses) depends on the extent to which the underlying returns are consistent with weak-form market efficiency.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-12-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44532854","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Vadim Zlotnikov, Mikhail Stukalo, I. Halperin, Lisa Huang, Cathy Pena
For many years, bonds have provided investors in a traditional 60/40 asset mix with a positive carry hedge to equity market volatility and drawdowns. However, with interest rates at historic lows and an evolving inflation backdrop that could impact the negative correlation of stocks and bonds, multi-asset class investors are searching for additional tools to mitigate risk. One novel tool involves creating a long-short portfolio of uncrowded assets. In particular, crowding in stocks held by asset managers has a significant impact on stock performance. Crowded assets and strategies result in outperformance during trending markets but exhibit significant drawdowns and failures of diversification during spikes in volatility. Crowded stocks are expected to deliver negatively skewed market-adjusted returns and higher forward volatility once the market players give up on crowded trades. Conversely, uncrowded assets have the potential for positive skewness and long vol-like behavior. This article computes a stock-level crowding measure based on active bets by mutual and hedge funds. We construct a long-short equity portfolio based on a combination of a pure holdings-based crowding measure that is long volatility, has minimal equity beta, is not persistently correlated with common risk factors (style), and has a negative correlation to the most crowded stocks. We show how this long-short equity portfolio can be combined with a traditional 60/40 portfolio in order to provide better structural diversification.
{"title":"Questioning the Wisdom of Crowds to Design Portfolio Diversification Strategies","authors":"Vadim Zlotnikov, Mikhail Stukalo, I. Halperin, Lisa Huang, Cathy Pena","doi":"10.3905/jai.2022.1.178","DOIUrl":"https://doi.org/10.3905/jai.2022.1.178","url":null,"abstract":"For many years, bonds have provided investors in a traditional 60/40 asset mix with a positive carry hedge to equity market volatility and drawdowns. However, with interest rates at historic lows and an evolving inflation backdrop that could impact the negative correlation of stocks and bonds, multi-asset class investors are searching for additional tools to mitigate risk. One novel tool involves creating a long-short portfolio of uncrowded assets. In particular, crowding in stocks held by asset managers has a significant impact on stock performance. Crowded assets and strategies result in outperformance during trending markets but exhibit significant drawdowns and failures of diversification during spikes in volatility. Crowded stocks are expected to deliver negatively skewed market-adjusted returns and higher forward volatility once the market players give up on crowded trades. Conversely, uncrowded assets have the potential for positive skewness and long vol-like behavior. This article computes a stock-level crowding measure based on active bets by mutual and hedge funds. We construct a long-short equity portfolio based on a combination of a pure holdings-based crowding measure that is long volatility, has minimal equity beta, is not persistently correlated with common risk factors (style), and has a negative correlation to the most crowded stocks. We show how this long-short equity portfolio can be combined with a traditional 60/40 portfolio in order to provide better structural diversification.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-11-26","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41773972","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The sensitivity of VIX futures to market movements changes over time with changes in market risk. Accordingly, in the case of using the OLS (ordinary least squares) model to hedge S&P 500 exposure with VIX futures, hedge ratios are affected by changes in risk appetite, which in turn contributes to the overall hedging performance as well as the asymmetry of the performance distribution. The conventional OLS approach does not effectively reflect this phenomenon in the model. In this study, the authors explore a new approach to improving hedging performance in the OLS model. They introduce an interaction term between the VIX and VIX futures returns into the OLS model. They find that the hedge ratios derived by the new approach provide better hedging results compared to the univariate OLS model in terms of mean return and downside risk protection, and also improve the asymmetry of the performance distribution. They extend their research to compare it with the performance of the dynamic conditional correlation (DCC)-generalized autoregressive conditional heteroskedasticity (GARCH) model. The new approach also shows better results than the DCC-GARCH approach. They obtain the same results in case studies of the Global Financial Crisis and the COVID-19 pandemic, and also in applying a trading strategy to each hedging methodology.
{"title":"A New Approach to Improving Hedging Performance in the OLS Model","authors":"Chongwon Kim, Hyeonjong Jung, Hyoung-Goo Kang","doi":"10.3905/jai.2022.1.176","DOIUrl":"https://doi.org/10.3905/jai.2022.1.176","url":null,"abstract":"The sensitivity of VIX futures to market movements changes over time with changes in market risk. Accordingly, in the case of using the OLS (ordinary least squares) model to hedge S&P 500 exposure with VIX futures, hedge ratios are affected by changes in risk appetite, which in turn contributes to the overall hedging performance as well as the asymmetry of the performance distribution. The conventional OLS approach does not effectively reflect this phenomenon in the model. In this study, the authors explore a new approach to improving hedging performance in the OLS model. They introduce an interaction term between the VIX and VIX futures returns into the OLS model. They find that the hedge ratios derived by the new approach provide better hedging results compared to the univariate OLS model in terms of mean return and downside risk protection, and also improve the asymmetry of the performance distribution. They extend their research to compare it with the performance of the dynamic conditional correlation (DCC)-generalized autoregressive conditional heteroskedasticity (GARCH) model. The new approach also shows better results than the DCC-GARCH approach. They obtain the same results in case studies of the Global Financial Crisis and the COVID-19 pandemic, and also in applying a trading strategy to each hedging methodology.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-10-29","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45925074","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2022-09-30DOI: 10.3905/jai.2022.25.2.001
Hossein Kazemi
{"title":"Editor’s Letter","authors":"Hossein Kazemi","doi":"10.3905/jai.2022.25.2.001","DOIUrl":"https://doi.org/10.3905/jai.2022.25.2.001","url":null,"abstract":"","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44850343","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This article analyzes the hedging potential of real estate and especially looks at the impact of lease contracts in various countries around the world on the inflation hedge capability for both expected and unexpected inflation. The dataset consists of direct real estate rent and capital value data for 59 cities/MSAs in 25 countries between 1991 and 2020 to make international comparison over a long time period possible. The results indicate that real estate is a good hedge against inflation, and especially against unexpected inflation. The inflation hedge capability of real estate is better for income than for change in capital value, as rent contracts are adjusted for inflation. Countries with graduated rent and revaluated rent contracts have the most positive relationship with inflation. The analysis of the lease length confirms that real estate is a better hedge against unexpected inflation, but increasing the lease length does not seem to have a positive influence on the hedge capability against unexpected inflation.
{"title":"Office Real Estate as a Hedge against Inflation and the Impact of Lease Contracts","authors":"Ivo de Wit","doi":"10.3905/jai.2022.1.175","DOIUrl":"https://doi.org/10.3905/jai.2022.1.175","url":null,"abstract":"This article analyzes the hedging potential of real estate and especially looks at the impact of lease contracts in various countries around the world on the inflation hedge capability for both expected and unexpected inflation. The dataset consists of direct real estate rent and capital value data for 59 cities/MSAs in 25 countries between 1991 and 2020 to make international comparison over a long time period possible. The results indicate that real estate is a good hedge against inflation, and especially against unexpected inflation. The inflation hedge capability of real estate is better for income than for change in capital value, as rent contracts are adjusted for inflation. Countries with graduated rent and revaluated rent contracts have the most positive relationship with inflation. The analysis of the lease length confirms that real estate is a better hedge against unexpected inflation, but increasing the lease length does not seem to have a positive influence on the hedge capability against unexpected inflation.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-09-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43966357","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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