This article proposes a generalized expected shortfall risk-budgeting investing framework, which offers a simple and flexible way to deal with various risks beyond volatility—namely, valuation, asymmetry, tail, and illiquidity risks. The authors empirically illustrate the methodology by proposing a risk-based strategic allocation for a multi-asset portfolio made of traditional and alternative assets with different degrees of liquidity. TOPICS: Tail risks, portfolio construction, real assets/alternative investments/private equity
{"title":"Expected Shortfall Asset Allocation: A Multi-Dimensional Risk-Budgeting Framework","authors":"Emmanuel Jurczenko, J. Teiletche","doi":"10.3905/jai.2019.1.078","DOIUrl":"https://doi.org/10.3905/jai.2019.1.078","url":null,"abstract":"This article proposes a generalized expected shortfall risk-budgeting investing framework, which offers a simple and flexible way to deal with various risks beyond volatility—namely, valuation, asymmetry, tail, and illiquidity risks. The authors empirically illustrate the methodology by proposing a risk-based strategic allocation for a multi-asset portfolio made of traditional and alternative assets with different degrees of liquidity. TOPICS: Tail risks, portfolio construction, real assets/alternative investments/private equity","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"22 - 7"},"PeriodicalIF":0.7,"publicationDate":"2019-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42174186","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 : 2019-09-30DOI: 10.3905/jai.2019.22.2.024
Kathryn M. Kaminski, Marat Molyboga
The authors study the impact of fees on the performance of multi-manager portfolios within managed futures. Using net-of-fee monthly returns of commodity trading advisors (CTAs) and their fee structures as reported in the BarclayHedge database, they estimate the time series of gross returns. They find that fees represent approximately 50% of gross performance, on average. They consider three fee structures: management fee only; a standard structure that includes both management and incentive fees; and a pooled, or netted, fee structure in which the incentive fee is based on aggregate portfolio performance rather than the performance of individual managers. They also vary the number of managers in a portfolio from 1 to 20 and consider crystallization frequencies between 3 and 12 months. Regardless of the fee structure, they find that average performance increases monotonically with the number of managers in a portfolio, and the distribution of performance becomes tighter. Performance improvement relative to a single-manager investment is highest for multi-manager portfolios that rely on a pooled fee structure. Pooling fees results in fee savings of up to 40% relative to the standard fee management and performance fee structures. They also find that less frequent crystallization consistently improves performance. TOPICS: Portfolio construction, manager selection, futures and forward contracts
{"title":"The Impact of Performance Fees on Multi-Manager CTA Portfolios","authors":"Kathryn M. Kaminski, Marat Molyboga","doi":"10.3905/jai.2019.22.2.024","DOIUrl":"https://doi.org/10.3905/jai.2019.22.2.024","url":null,"abstract":"The authors study the impact of fees on the performance of multi-manager portfolios within managed futures. Using net-of-fee monthly returns of commodity trading advisors (CTAs) and their fee structures as reported in the BarclayHedge database, they estimate the time series of gross returns. They find that fees represent approximately 50% of gross performance, on average. They consider three fee structures: management fee only; a standard structure that includes both management and incentive fees; and a pooled, or netted, fee structure in which the incentive fee is based on aggregate portfolio performance rather than the performance of individual managers. They also vary the number of managers in a portfolio from 1 to 20 and consider crystallization frequencies between 3 and 12 months. Regardless of the fee structure, they find that average performance increases monotonically with the number of managers in a portfolio, and the distribution of performance becomes tighter. Performance improvement relative to a single-manager investment is highest for multi-manager portfolios that rely on a pooled fee structure. Pooling fees results in fee savings of up to 40% relative to the standard fee management and performance fee structures. They also find that less frequent crystallization consistently improves performance. TOPICS: Portfolio construction, manager selection, futures and forward contracts","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"24 - 34"},"PeriodicalIF":0.7,"publicationDate":"2019-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"42330537","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}
In this article, the authors suggest a different approach to hedging tail risk in certain segments of the fixed-income market. VIX® futures are based on the implied volatility of equities and therefore are not an obvious choice for hedging the tail risk of bonds. Nevertheless, the authors show that there is a negative correlation between returns for credit-focused bonds and VIX futures, and the strength of the inverse relationship increases during down markets, precisely when the hedge is most needed. This should not be too surprising given that credit risk is positively correlated with equity market risk. In this light, VIX futures, tradable instruments linked to the VIX, become a viable alternative hedging instrument for bonds with significant credit risk. Because there are significant roll costs associated with VIX futures during non-stressed periods, a static hedge will create a drag on returns, but a dynamic hedge can effectively reduce credit-focused bond losses during times of stress. TOPICS: Emerging markets, tail risks, futures and forward contracts
{"title":"Hedging High-Yield and Emerging Market Bond Tail Risk with VIX® Futures","authors":"Berlinda Liu, Hong Xie","doi":"10.3905/jai.2019.1.080","DOIUrl":"https://doi.org/10.3905/jai.2019.1.080","url":null,"abstract":"In this article, the authors suggest a different approach to hedging tail risk in certain segments of the fixed-income market. VIX® futures are based on the implied volatility of equities and therefore are not an obvious choice for hedging the tail risk of bonds. Nevertheless, the authors show that there is a negative correlation between returns for credit-focused bonds and VIX futures, and the strength of the inverse relationship increases during down markets, precisely when the hedge is most needed. This should not be too surprising given that credit risk is positively correlated with equity market risk. In this light, VIX futures, tradable instruments linked to the VIX, become a viable alternative hedging instrument for bonds with significant credit risk. Because there are significant roll costs associated with VIX futures during non-stressed periods, a static hedge will create a drag on returns, but a dynamic hedge can effectively reduce credit-focused bond losses during times of stress. TOPICS: Emerging markets, tail risks, futures and forward contracts","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"81 - 98"},"PeriodicalIF":0.7,"publicationDate":"2019-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41826567","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 : 2019-09-30DOI: 10.3905/jai.2019.22.2.001
Hossein Kazemi
{"title":"Editor’s Letter","authors":"Hossein Kazemi","doi":"10.3905/jai.2019.22.2.001","DOIUrl":"https://doi.org/10.3905/jai.2019.22.2.001","url":null,"abstract":"","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"1 - 2"},"PeriodicalIF":0.7,"publicationDate":"2019-09-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46877383","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}
Exchange-traded funds (ETFs) are commonly regarded as an efficient, low-cost alternative to actively managed mutual funds, yet their perceived superiority is largely anecdotal. This article evaluates the performance of a comprehensive, survivorship-bias-free sample of US equity ETFs following the approach that has been commonly used to evaluate the performance of actively managed mutual funds. The authors find that ETFs have collectively lagged the market by an amount similar to the widely documented underperformance of active mutual funds. They perform textual and regression-based analysis to identify factor ETFs and show that most of these have also failed to beat the market. They conclude that from a pure performance perspective, the allure of ETFs finds little support in the data. TOPICS: Factor-based models, mutual fund performance, passive strategies, exchange-traded funds and applications Key Findings ▪ ETFs have collectively lagged the market by about the same amount as active mutual funds. ▪ Most smart beta ETFs have also failed to beat the market. ▪ From a pure performance perspective, the allure of ETFs finds little support in the data.
{"title":"The Performance of Exchange-Traded Funds","authors":"David Blitz, M. Vidojevic","doi":"10.2139/ssrn.3458275","DOIUrl":"https://doi.org/10.2139/ssrn.3458275","url":null,"abstract":"Exchange-traded funds (ETFs) are commonly regarded as an efficient, low-cost alternative to actively managed mutual funds, yet their perceived superiority is largely anecdotal. This article evaluates the performance of a comprehensive, survivorship-bias-free sample of US equity ETFs following the approach that has been commonly used to evaluate the performance of actively managed mutual funds. The authors find that ETFs have collectively lagged the market by an amount similar to the widely documented underperformance of active mutual funds. They perform textual and regression-based analysis to identify factor ETFs and show that most of these have also failed to beat the market. They conclude that from a pure performance perspective, the allure of ETFs finds little support in the data. TOPICS: Factor-based models, mutual fund performance, passive strategies, exchange-traded funds and applications Key Findings ▪ ETFs have collectively lagged the market by about the same amount as active mutual funds. ▪ Most smart beta ETFs have also failed to beat the market. ▪ From a pure performance perspective, the allure of ETFs finds little support in the data.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"23 1","pages":"81 - 99"},"PeriodicalIF":0.7,"publicationDate":"2019-09-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43296144","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}
In this article, we propose a generalized risk-based investing framework, which makes it possible to deal in a simple and flexible way with various risks beyond volatility, namely valuation, asymmetry, tail and illiquidity risks. We empirically illustrate the methodology by proposing a risk-based strategic allocation for a multi-asset portfolio made of traditional and alternative assets with different degrees of liquidity.
{"title":"Risk-Based Allocation for Illiquid and Alternative Investments","authors":"Emmanuel Jurczenko","doi":"10.3905/JAI.V22I2.4398","DOIUrl":"https://doi.org/10.3905/JAI.V22I2.4398","url":null,"abstract":"In this article, we propose a generalized risk-based investing framework, which makes it possible to deal in a simple and flexible way with various risks beyond volatility, namely valuation, asymmetry, tail and illiquidity risks. We empirically illustrate the methodology by proposing a risk-based strategic allocation for a multi-asset portfolio made of traditional and alternative assets with different degrees of liquidity.","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":" ","pages":""},"PeriodicalIF":0.7,"publicationDate":"2019-09-15","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"48536699","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 carry trade in foreign currencies is known for delivering positive returns, on average, and for occasionally suffering large losses. While these characteristics prevail, on average, across time and across currency pairs, the authors find that interest rate differentials on their own are not sufficient to identify conditions in which currencies reliably exhibit these return and risk attributes. They use three variables—valuation, crowding, and volatility—to identify time periods and cross-sections of currencies in which the carry trade performs best. They document a substantial difference in performance between the carry trade applied to high-volatility versus low-volatility currency pairs. In the full sample from 1984 to 2017, carry in high-volatility pairs has consisted of currencies that are undervalued, on average, experience greater swings in valuation, and have boom and bust cycles aligned with investor crowding. This finding is consistent with the notion that carry represents a risk premium. Carry in low-volatility pairs has the opposite characteristics. Though both strategies performed well prior to the 2008 financial crisis, only carry in high-volatility pairs has worked since. TOPICS: Currency, quantitative methods, analysis of individual factors/risk premia
{"title":"Carry On","authors":"M. Czasonis, B. Pamir, D. Turkington","doi":"10.3905/jai.2019.1.079","DOIUrl":"https://doi.org/10.3905/jai.2019.1.079","url":null,"abstract":"The carry trade in foreign currencies is known for delivering positive returns, on average, and for occasionally suffering large losses. While these characteristics prevail, on average, across time and across currency pairs, the authors find that interest rate differentials on their own are not sufficient to identify conditions in which currencies reliably exhibit these return and risk attributes. They use three variables—valuation, crowding, and volatility—to identify time periods and cross-sections of currencies in which the carry trade performs best. They document a substantial difference in performance between the carry trade applied to high-volatility versus low-volatility currency pairs. In the full sample from 1984 to 2017, carry in high-volatility pairs has consisted of currencies that are undervalued, on average, experience greater swings in valuation, and have boom and bust cycles aligned with investor crowding. This finding is consistent with the notion that carry represents a risk premium. Carry in low-volatility pairs has the opposite characteristics. Though both strategies performed well prior to the 2008 financial crisis, only carry in high-volatility pairs has worked since. TOPICS: Currency, quantitative methods, analysis of individual factors/risk premia","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"100 - 111"},"PeriodicalIF":0.7,"publicationDate":"2019-07-03","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"45686119","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 : 2019-06-30DOI: 10.3905/jai.2019.22.1.096
Tobias Glas
Asset pricing models and investment styles have been researched intensively in equities, bonds, FX, and commodities. However, a new asset class has emerged since the end of 2008, namely, cryptocurrencies such as Bitcoin and Ethereum, among others. The author uses an extensive data set of over 1,500 cryptocurrencies and shows that almost none of the traditional investment styles such as momentum or defensive appear to be successful in this young asset class. Cryptocurrencies are also independent from the macroeconomic environment and cannot be explained by a standard asset pricing model. A cryptocurrency specific model yields clearly better results. In addition, the whole cryptocurrency space is dominated by only a few individual digital coins. Equally weighted mean monthly returns appear to be random with low or even no correlation with traditional asset classes such as US equities and global FX. TOPICS: Real assets/alternative investments/private equity, performance measurement, portfolio management/multi-asset allocation
{"title":"Investments in Cryptocurrencies: Handle with Care!","authors":"Tobias Glas","doi":"10.3905/jai.2019.22.1.096","DOIUrl":"https://doi.org/10.3905/jai.2019.22.1.096","url":null,"abstract":"Asset pricing models and investment styles have been researched intensively in equities, bonds, FX, and commodities. However, a new asset class has emerged since the end of 2008, namely, cryptocurrencies such as Bitcoin and Ethereum, among others. The author uses an extensive data set of over 1,500 cryptocurrencies and shows that almost none of the traditional investment styles such as momentum or defensive appear to be successful in this young asset class. Cryptocurrencies are also independent from the macroeconomic environment and cannot be explained by a standard asset pricing model. A cryptocurrency specific model yields clearly better results. In addition, the whole cryptocurrency space is dominated by only a few individual digital coins. Equally weighted mean monthly returns appear to be random with low or even no correlation with traditional asset classes such as US equities and global FX. TOPICS: Real assets/alternative investments/private equity, performance measurement, portfolio management/multi-asset allocation","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"113 - 96"},"PeriodicalIF":0.7,"publicationDate":"2019-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"43103887","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}
Often lauded for offering superior performance, investing in private equity (PE) is costly as investors have to pay fees and committed capital is illiquid for a long-time horizon: Could returns be replicated by levered investments in public markets? This article aims to emulate leveraged buyouts in the public market by purchasing undervalued and poorly performing stocks typical of buyout targets. Similar to LBO transactions, simulated investments are financed partly by debt and realized after five-year holding periods. The authors’ investment strategy yields IRRs of up to 13.2%, less than the average of 14.2% reported in studies that analyze PE performance, but without the long periods of illiquidity that characterize the PE market. Finally, in time periods of economic boom, the authors’ simulated investments outperform those of PE. The authors offer a new investment perspective for investors without the adverse costs of PE. TOPICS: Private equity, performance measurement, portfolio construction
{"title":"Why Invest in Private Equity? A Comparison of Private Equity and Stock Market Returns","authors":"Kevin Marchel, G. Markarian","doi":"10.3905/jai.2019.1.074","DOIUrl":"https://doi.org/10.3905/jai.2019.1.074","url":null,"abstract":"Often lauded for offering superior performance, investing in private equity (PE) is costly as investors have to pay fees and committed capital is illiquid for a long-time horizon: Could returns be replicated by levered investments in public markets? This article aims to emulate leveraged buyouts in the public market by purchasing undervalued and poorly performing stocks typical of buyout targets. Similar to LBO transactions, simulated investments are financed partly by debt and realized after five-year holding periods. The authors’ investment strategy yields IRRs of up to 13.2%, less than the average of 14.2% reported in studies that analyze PE performance, but without the long periods of illiquidity that characterize the PE market. Finally, in time periods of economic boom, the authors’ simulated investments outperform those of PE. The authors offer a new investment perspective for investors without the adverse costs of PE. TOPICS: Private equity, performance measurement, portfolio construction","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"20 - 36"},"PeriodicalIF":0.7,"publicationDate":"2019-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"41779410","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 : 2019-06-30DOI: 10.3905/jai.2019.22.1.127
M. Holub, Jackie Johnson
The authors study trading behavior on LocalBitcoins, an alternative platform to conventional exchanges that allow investors all over the world to trade Bitcoin on a peer-to-peer basis. In particular, the authors examine the anomalous trade prices on LocalBitcoins, which are settled at values significantly different from market prices. As LocalBitcoins is not regulated in the way some exchanges are regulated, the persistence of the anomalous prices suggests that traders may be able to take advantage of the phenomenon to make substantial gains. TOPICS: Real assets/alternative investments/private equity, performance measurement, statistical methods
{"title":"Bitcoin Price Anomalies: Peer-to-Peer (P2P) Trading on LocalBitcoins","authors":"M. Holub, Jackie Johnson","doi":"10.3905/jai.2019.22.1.127","DOIUrl":"https://doi.org/10.3905/jai.2019.22.1.127","url":null,"abstract":"The authors study trading behavior on LocalBitcoins, an alternative platform to conventional exchanges that allow investors all over the world to trade Bitcoin on a peer-to-peer basis. In particular, the authors examine the anomalous trade prices on LocalBitcoins, which are settled at values significantly different from market prices. As LocalBitcoins is not regulated in the way some exchanges are regulated, the persistence of the anomalous prices suggests that traders may be able to take advantage of the phenomenon to make substantial gains. TOPICS: Real assets/alternative investments/private equity, performance measurement, statistical methods","PeriodicalId":45142,"journal":{"name":"Journal of Alternative Investments","volume":"22 1","pages":"127 - 139"},"PeriodicalIF":0.7,"publicationDate":"2019-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"46343554","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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