Pub Date : 2022-03-31DOI: 10.3905/jai.2022.24.4.001
Hossein Kazemi
{"title":"Editor’s Letter","authors":"Hossein Kazemi","doi":"10.3905/jai.2022.24.4.001","DOIUrl":"https://doi.org/10.3905/jai.2022.24.4.001","url":null,"abstract":"","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41418557","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 changes in the roles of crude oil futures in financial portfolios due to financialization. To examine the changes, we propose a new dynamic market model between stock and crude oil futures prices, and a new dynamic allocation model of optimal portfolios, by considering the impact of financialization on crude oil markets. Our results show that before crude oil financialization, the optimal positions in S&P 500 varied with time, while those in WTI and Brent crude oil futures stayed almost at the same levels, implying diversification effects from crude oil futures for financial assets. However, after the financialization, the optimal positions of crude oil, particularly WTI futures, decreased chronologically. The parallel shifts of long S&P 500 and short crude oil futures positions may suggest the realization of cash and carry strategies using crude oil futures instead of S&P 500 futures. The role of crude oil futures in financial portfolios can change from diversification to cash and carry arbitrage due to financialization.
{"title":"Role of Crude Oil Futures in Financial Portfolios under Financialization","authors":"Takashi Kanamura","doi":"10.3905/jai.2022.1.159","DOIUrl":"https://doi.org/10.3905/jai.2022.1.159","url":null,"abstract":"This article analyzes the changes in the roles of crude oil futures in financial portfolios due to financialization. To examine the changes, we propose a new dynamic market model between stock and crude oil futures prices, and a new dynamic allocation model of optimal portfolios, by considering the impact of financialization on crude oil markets. Our results show that before crude oil financialization, the optimal positions in S&P 500 varied with time, while those in WTI and Brent crude oil futures stayed almost at the same levels, implying diversification effects from crude oil futures for financial assets. However, after the financialization, the optimal positions of crude oil, particularly WTI futures, decreased chronologically. The parallel shifts of long S&P 500 and short crude oil futures positions may suggest the realization of cash and carry strategies using crude oil futures instead of S&P 500 futures. The role of crude oil futures in financial portfolios can change from diversification to cash and carry arbitrage due to financialization.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-03-02","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"47584970","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 : 2022-02-22DOI: 10.3905/jai.2022.jaipa054
Mark S. Rzepczynski
{"title":"Practical Applications of Narrative, Storytelling, and Qualitative Due Diligence","authors":"Mark S. Rzepczynski","doi":"10.3905/jai.2022.jaipa054","DOIUrl":"https://doi.org/10.3905/jai.2022.jaipa054","url":null,"abstract":"","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-02-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49100555","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 proposes an exponentially weighted returns approach for constructing portfolios of hedge funds. This approach, which gives more weight to more recent observations, allows for volatility and higher moment dynamics in portfolio construction. Using monthly hedge fund index returns from the Hedge Fund Research Database for January 1990 to December 2020, we find that the proposed approach significantly improves portfolio performance in terms of enhanced returns, reduced risk, and improved risk-adjusted returns compared to the benchmark equally weighted approach. However, the exponentially weighted method generally requires more frequent portfolio rebalancing to capture the return distribution dynamics, and the turnover varies across different portfolio optimization models. Therefore, investors should select an appropriate optimization strategy when implementing this approach for hedge fund portfolio construction. Moreover, we show that the results are robust to the choice of decay factor for the exponential weighting, target returns, and estimation window size, and across low-volatility, high-volatility, and most recent evaluation periods.
{"title":"Dynamic Hedge Fund Portfolio Construction: Exponentially Weighted Returns Approach","authors":"Wei Kuang","doi":"10.3905/jai.2022.1.156","DOIUrl":"https://doi.org/10.3905/jai.2022.1.156","url":null,"abstract":"This article proposes an exponentially weighted returns approach for constructing portfolios of hedge funds. This approach, which gives more weight to more recent observations, allows for volatility and higher moment dynamics in portfolio construction. Using monthly hedge fund index returns from the Hedge Fund Research Database for January 1990 to December 2020, we find that the proposed approach significantly improves portfolio performance in terms of enhanced returns, reduced risk, and improved risk-adjusted returns compared to the benchmark equally weighted approach. However, the exponentially weighted method generally requires more frequent portfolio rebalancing to capture the return distribution dynamics, and the turnover varies across different portfolio optimization models. Therefore, investors should select an appropriate optimization strategy when implementing this approach for hedge fund portfolio construction. Moreover, we show that the results are robust to the choice of decay factor for the exponential weighting, target returns, and estimation window size, and across low-volatility, high-volatility, and most recent evaluation periods.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44473642","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 central decision for a pension fund is the allocation between stocks and bonds. For intellectual backup in making this decision, many rely on metrics and methods from Modern Portfolio Theory (MPT). We show how, historically, such an “optimal” portfolio is in effect the least optimal one, as it fails to protect against tail risk and under-allocates to the high-returning asset class. MPT fails in both risk control and real-world investment optimization.
{"title":"Pension Funds Should Never Rely on Correlation","authors":"R. Lagnado, N. Taleb","doi":"10.3905/jai.2022.1.157","DOIUrl":"https://doi.org/10.3905/jai.2022.1.157","url":null,"abstract":"The central decision for a pension fund is the allocation between stocks and bonds. For intellectual backup in making this decision, many rely on metrics and methods from Modern Portfolio Theory (MPT). We show how, historically, such an “optimal” portfolio is in effect the least optimal one, as it fails to protect against tail risk and under-allocates to the high-returning asset class. MPT fails in both risk control and real-world investment optimization.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-02-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48452990","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 examines the importance of rare whisky as an alternative asset class, with particular attention given to its price driving factors, risk-return characteristics, and diversification potential. We show that rare whisky has specific characteristics in terms of the driving factors of its price that differ significantly from those of traditional financial assets, making rare whisky interesting as an investment. Furthermore, we analyze the risk-return characteristics of rare whisky in detail and compare them with those of stocks, bonds, hedge funds, private equity, commodities, real estate, and fine wines based on monthly data for the period from January 2013 to December 2020. The specific risk-return characteristics of rare whisky compared to the other asset classes under investigation suggest that rare whisky should be considered a separate asset class. Furthermore, it can be demonstrated that the addition of rare whisky to an international multi-asset portfolio leads to statistically significant performance improvements for various investment strategies.
{"title":"Does Rare Whisky Add Value in Multi-Asset Portfolios?","authors":"Lars Tegtmeier","doi":"10.3905/jai.2022.1.154","DOIUrl":"https://doi.org/10.3905/jai.2022.1.154","url":null,"abstract":"This article examines the importance of rare whisky as an alternative asset class, with particular attention given to its price driving factors, risk-return characteristics, and diversification potential. We show that rare whisky has specific characteristics in terms of the driving factors of its price that differ significantly from those of traditional financial assets, making rare whisky interesting as an investment. Furthermore, we analyze the risk-return characteristics of rare whisky in detail and compare them with those of stocks, bonds, hedge funds, private equity, commodities, real estate, and fine wines based on monthly data for the period from January 2013 to December 2020. The specific risk-return characteristics of rare whisky compared to the other asset classes under investigation suggest that rare whisky should be considered a separate asset class. Furthermore, it can be demonstrated that the addition of rare whisky to an international multi-asset portfolio leads to statistically significant performance improvements for various investment strategies.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-01-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"44324261","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}
Bitcoin market capitalization recently surpassed $1 trillion. While popular belief holds that a key characteristic of bitcoin is its excessive volatility, this article provides evidence that this is largely a misperception. We show that bitcoin return fluctuations are lower than those of roughly 900 stocks in the S&P1500 and 190 stocks in the S&P500. Moreover, we find that bitcoin is less volatile than commodities such as oil and silver, US Treasuries, AAA-rated corporate bonds, EU carbon credits, and some of the most popular technology and media stocks, including Apple, Twitter, and Netflix. Equally important, we find that during the March 2020 stock market crash triggered by COVID-19, the volatility of bitcoin was lower than that of most of these asset classes. The significant decline in bitcoin volatility over the past decade renders it more investable for conservative investors.
{"title":"Misperceptions of Bitcoin Volatility","authors":"M. Mazur","doi":"10.3905/jai.2022.1.153","DOIUrl":"https://doi.org/10.3905/jai.2022.1.153","url":null,"abstract":"Bitcoin market capitalization recently surpassed $1 trillion. While popular belief holds that a key characteristic of bitcoin is its excessive volatility, this article provides evidence that this is largely a misperception. We show that bitcoin return fluctuations are lower than those of roughly 900 stocks in the S&P1500 and 190 stocks in the S&P500. Moreover, we find that bitcoin is less volatile than commodities such as oil and silver, US Treasuries, AAA-rated corporate bonds, EU carbon credits, and some of the most popular technology and media stocks, including Apple, Twitter, and Netflix. Equally important, we find that during the March 2020 stock market crash triggered by COVID-19, the volatility of bitcoin was lower than that of most of these asset classes. The significant decline in bitcoin volatility over the past decade renders it more investable for conservative investors.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2022-01-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48141070","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 : 2021-12-31DOI: 10.3905/jai.2021.24.3.001
Hossein Kazemi
{"title":"Editor’s Letter","authors":"Hossein Kazemi","doi":"10.3905/jai.2021.24.3.001","DOIUrl":"https://doi.org/10.3905/jai.2021.24.3.001","url":null,"abstract":"","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-12-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"49037340","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}
Longevity risk, the risk that a member of a pension plan or an annuity holder lives much longer than anticipated, can cause shortfalls in funding for writers of insurance policies, annuities, and pension benefits. Reimbursement risk, the risk faced by health benefit providers in paying for expensive new drugs, can similarly cause shortfalls for health insurance firms and other benefit providers, particularly as the costs of specialty drugs increase. These risks can be acute when scientific breakthroughs increase new drug development rates. An emerging asset class, research-backed obligations (RBOs) (Fernandez et al. 2012; Hull et al. 2019), has the potential to provide a natural hedge for a broad class of such risks. This article demonstrates how to calculate simplified, first-order portfolio-specific hedge ratios. The author presents simulation results that demonstrate the benefits of such hedges for a hypothetical health insurance portfolio facing rapid increases in reimbursement risk due to the high cost of new specialty drugs.
长寿风险，即养老金计划的成员或年金持有人的寿命比预期长得多的风险，可能导致保单、年金和养老金福利的撰写者资金短缺。报销风险，即健康福利提供者在支付昂贵的新药时面临的风险，同样可能导致健康保险公司和其他福利提供者出现资金短缺，特别是在特殊药物成本增加的情况下。当科学突破提高新药开发速度时，这些风险可能会变得严重。新兴资产类别，研究支持债券(rbo) (Fernandez et al. 2012;Hull et al. 2019)，有可能为广泛的此类风险提供自然对冲。本文演示了如何计算简化的一阶特定于投资组合的对冲比率。作者提出的模拟结果表明，这种对冲的好处，为一个假设的健康保险组合面临快速增加的补偿风险，由于新的特殊药品的高成本。
{"title":"Using RBOs and Megafunds to Hedge Longevity Risk and Specialty Drug Costs","authors":"Roger M. Stein","doi":"10.3905/jai.2021.1.151","DOIUrl":"https://doi.org/10.3905/jai.2021.1.151","url":null,"abstract":"Longevity risk, the risk that a member of a pension plan or an annuity holder lives much longer than anticipated, can cause shortfalls in funding for writers of insurance policies, annuities, and pension benefits. Reimbursement risk, the risk faced by health benefit providers in paying for expensive new drugs, can similarly cause shortfalls for health insurance firms and other benefit providers, particularly as the costs of specialty drugs increase. These risks can be acute when scientific breakthroughs increase new drug development rates. An emerging asset class, research-backed obligations (RBOs) (Fernandez et al. 2012; Hull et al. 2019), has the potential to provide a natural hedge for a broad class of such risks. This article demonstrates how to calculate simplified, first-order portfolio-specific hedge ratios. The author presents simulation results that demonstrate the benefits of such hedges for a hypothetical health insurance portfolio facing rapid increases in reimbursement risk due to the high cost of new specialty drugs.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-12-07","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43739142","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}
There is no question that alternatives are having their day in the sun. Private market managers, across a wide range of strategies, are fundraising at a record pace. Hedge funds thought left behind in the face of a 12-year bull market in public equities are seeing a resurgence of interest from institutional investors. The term “alternatives,” while a general moniker for anything not “long-only,” represents a wide range of investment strategies with various risk parameters, supporting processes, and necessary infrastructure. While there are certainly some commonalities in assessing a listed security-focused hedge fund versus a private markets-focused manager (people, regulatory standing, alignment of interests), there are considerable differences in how these two types of “alternative” managers invest, report, hire, reconcile, and generally operate their businesses. Two of the most prominent industry associations supporting non-traditional asset classes, the Alternative Investment Management Association (AIMA) and the Institutional Limited Partners Association (ILPA), each publish a comprehensive due diligence questionnaire to assist Limited Partners (LPs) in their manager research efforts. This article examines how each questionnaire can be utilized in understanding both the investment and operational differences between hedge funds trading listed securities and managers focused solely on private transactions.
{"title":"Alternatives Manager Research through the Lens of Industry Standard DDQs","authors":"Andre Boreas","doi":"10.3905/jai.2021.1.152","DOIUrl":"https://doi.org/10.3905/jai.2021.1.152","url":null,"abstract":"There is no question that alternatives are having their day in the sun. Private market managers, across a wide range of strategies, are fundraising at a record pace. Hedge funds thought left behind in the face of a 12-year bull market in public equities are seeing a resurgence of interest from institutional investors. The term “alternatives,” while a general moniker for anything not “long-only,” represents a wide range of investment strategies with various risk parameters, supporting processes, and necessary infrastructure. While there are certainly some commonalities in assessing a listed security-focused hedge fund versus a private markets-focused manager (people, regulatory standing, alignment of interests), there are considerable differences in how these two types of “alternative” managers invest, report, hire, reconcile, and generally operate their businesses. Two of the most prominent industry associations supporting non-traditional asset classes, the Alternative Investment Management Association (AIMA) and the Institutional Limited Partners Association (ILPA), each publish a comprehensive due diligence questionnaire to assist Limited Partners (LPs) in their manager research efforts. This article examines how each questionnaire can be utilized in understanding both the investment and operational differences between hedge funds trading listed securities and managers focused solely on private transactions.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":null,"pages":null},"PeriodicalIF":0.7,"publicationDate":"2021-12-06","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41930300","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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