articles

  • 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 ...

  • Thu, 07 Aug 2014 16:09:06 GMT

    The most frequently repeated mantra in pension land is probably that everything will be well once interest rates rise from their unprecedentedly/artificially/outrageously low levels. The value of liabilities will fall, funding positions will improve and the future will look a lot brighter for defined benefit schemes. There are a number of reasons why this desired state of affairs may take longer to arrive than most people would like. Whilst it is clearly difficult to make market forecasts (after all if we were good at forecasting the markets we would all have different jobs…), it ...

  • Tue, 05 Aug 2014 17:30:24 GMT

    “Carney tells UK to prepare for rate rises” - Financial Times, June 2014. The general consensus is that the Bank of England (BoE) will increase base rates early in 2015 (or maybe even sooner). This is an increase in interest rates, which is good for Defined Benefit (DB) pension funds right? Not necessarily. A rise in the base rate is not a guarantee that the value of pension fund liabilities will fall.  Why are interest rates important for DB pension funds? DB pension funds have to make pension payments to their members in the future, these are known as the fund’ ...

  • Wed, 30 Jul 2014 15:31:51 GMT

    Last week’s announcements on how the Government plans to implement its new rules on annuities mark a seminal moment in the on-going pension revolution. Some necessary flesh has been now added to the bare bones of the Budget bombshell that savers in DC schemes would no longer have to convert their pension pots into annuities. But at the start of most revolutions, it is usually hard to predict where they will end. This is particularly true of this one. What seems to be clear, however, is that if this revolution is to lead to greater incentives to save (which should perhaps be the r ...

  • Tue, 29 Jul 2014 17:07:38 GMT

    What does running a successful lab experiment have in common with managing a pension scheme to full funding? The final hurdle of my biochemistry degree was a 10,000 word report on the results of a 2 month lab project. The aim of the project was to identify the role of an unknown protein, in a newly discovered cellular system, in a mildly contagious strain of Escherichia. Coli. A hard task! Not least because there are thousands of reagents and hundreds of experiments that could lead down a path of years of work with no guarantee of achieving any useful results. I only had 2 months and my ...