articles

  • Tue, 11 Nov 2014 18:52:46 GMT

    When I woke up this morning and read through the latest breaking news, I was delighted to see that the long awaited Shanghai-Hong Kong exchange connect program will formally debut on 17th November 2014. Although the intention of the regulator to take such a key step towards greater financial liberalisation in the world’s second largest economy was announced six months ago, the actual effective date has been delayed and was never certain partly due to the pro-democracy protests in Hong Kong. In this article I explain what has happened, why it matters and what the implications ar ...

  • Thu, 06 Nov 2014 14:18:34 GMT

    Summary In the same week that the Federal Reserve ended Quantitative Easing (QE) the Bank of Japan increased QE The Japanese Government Pension Investment Fund moves away from bonds and towards equities The pension fund has a clear objective for the change in asset allocation The new asset allocation is relying on equity risk premia and FX carry to generate returns This may work in the inflationary environment that the fund expects but may not if deflation continues Using leverage would enable a more balanced allocation between performance in inflati ...

  • Wed, 29 Oct 2014 15:00:51 GMT

    One of the core responsibilities of a pensions investment consultant is to educate trustees about the unique risks that liability-targeting investors face, and to keep them informed about changes in the economic and regulatory environment. When done effectively this allows both trustees and consultants to see the fund’s current position from the same perspective, and acts as the foundation for subsequent decisions.   The process of educating trustees is an example of what I believe to be the key issue in pensions: communication between trustees and their consultants. Eve ...

  • Fri, 10 Oct 2014 11:39:10 GMT

    Many asset classes have experienced high (by historical standards) returns in recent years at comparatively low levels of volatility. Some equity indices for example have recently made new all-time highs. However plenty of risks remain. Investors and pension funds need to generate returns from their assets, but worry about what a big fall in their value could do to their position. Given this backdrop, it’s no surprise that strategies and approaches that look to control risk by curbing exposures at the most risky times are gaining popularity. One approach that we’ve bee ...

  • Tue, 30 Sep 2014 09:46:46 GMT

    Friday’s big news that Bill Gross was to leave PIMCO, the bond house he co-founded in 1971, almost instantly led to questions being asked about bond market liquidity and what the possible impact might be on investors.   Bond market liquidity has come under a lot of scrutiny of late, if I had a pound for every time I’d been shown the graph below (a quick Google search shows many versions  – hat tip to FT Alphaville in this case) then, well, I guess I’d have at least £25 (just about enough for a round in the City…). It seems like a relat ...

  • Wed, 17 Sep 2014 13:52:25 GMT

    Tail risk hedging seems to be a popular topic at the moment, why? Markets are at highs, but plenty of risks remain. While equity markets have rallied considerably in recent years – the equity market (as measured by the MSCI World Index) is up over 30% since Mario Draghi proclaimed the ECB had “removed tail risk for Europe” in September 2012 – with only short periods of losses (relative to history) and low levels of volatility, there are plenty of macro risks out there that could threaten stability. But at the same time there are diminishing opportunit ...

  • Fri, 05 Sep 2014 11:42:59 GMT

    Previously I wrote about the dangers of unscientific backtesting, and promised to show how it might be mitigated. Because the ideas are quite abstract, and because it’s where this issue arguably poses the greatest risk, where relevant I will use style premia as an illustration of the basic idea. The first, and arguably most important mitigant, is to recognize that we do not start knowing nothing[1]. As such, we should need less evidence to convince ourselves of sensible ideas than ridiculous ones. A newspaper article would convince me that a celebrity had died of a heart attack, bu ...

  • Thu, 28 Aug 2014 16:18:15 GMT

    An LDI benchmark allows you to define the goals of your LDI portfolio, enables the manager to take a dynamic approach to managing the portfolio and is a tool to measure the performance of the LDI manager. My previous blog highlighted the key objectives of an LDI benchmark, but how do you construct one in practice? Here are the 5 key building blocks:  1)      Receive cash flows from Scheme Actuary and inflate using the appropriate inflation rate (i.e. CPI, RPI, LPI)   An LDI benchmark is a series of cash flows, these cash flows are based on the liabili ...

  • Wed, 13 Aug 2014 17:11:48 GMT

    There are some topics that grab your imagination, and demand immediate attention and interest: things like war, recession, and the World Cup. Unless you share my particular personality quirks, however, the risks of unscientific backtests are unlikely to be among them. This is a shame, however, as unscientific backtesting poses a pervasive, insidious and largely unquantifiable hazard. There are many reasons why backtests may turn out to be unscientific, but in principle the mistake is always the same - where there is a lot of noise in a data set, and one can try lots of models, it is easy ...

  • Mon, 11 Aug 2014 09:33:17 GMT

    Round the Island race is one of the largest yacht races in the world hosting 16,000 sailors on 1,700 boats, who are fiercely competing with each other to race around the Isle of Wight. This year’s race, albeit on a beautifully sunny summer solstice day, was plagued by light airs. Under these conditions sailing races are only won with intense concentration, strategic thinking and skill. The first leg of the race is from the sailing capital of the world, Cowes, to the western most point of the Solent marked by the Needles. This leg took an almighty 4 hours of concentration, strategy a ...