on alphas and betas: global equity and hedge funds
TRANSCRIPT
L U M E N I N V E S T M E N T S
L U M E N
S a n F r a n c i s c o S i n g a p o r e S a o P a u l o N e w Y o r k
On Alphas and Betas: Global Equity and Hedge Funds
Aaron Low
Principal
Lumen Investments
CFA Institute Board of Governors
13 March 2013
L U M E N I N V E S T M E N T S
TAKE 15
GLOBAL EQUITY MARKETS
o GLOBAL VS EMERGING & ASIA
GLOBAL HEDGE FUNDS
o SEARCHING FOR ALPHAS
o ALPHA BETA SEPARATION
L U M E N I N V E S T M E N T S
EQUITY VALUATION CHEAP OR REASONABLY PRICED?
US equity PE is close to historical norm ….. …. But ‘cyclically adjusted’ valuations look a little more challenging
L U M E N I N V E S T M E N T S
BONDS AS INSURANCE FOR RISK ON TRADES
Although methodologically unrelated, …., from a finance theoretical perspective, the mark-to-market volatility associated with bond duration is not a source of risk if it is negatively correlated with broader measures of market risk.
Rather, it is a source of insurance, or market risk mitigation. Investors could, for example, use their holdings of ‘safe haven’ bonds to diversify away some exposure to market risk created by their equity portfolio. They should not expect to be paid for owning this insurance; they should expect to pay for it, in the form of a negative risk premium. From this perspective, it makes perfect sense to expect (in contrast to much historical experience) ‘safe haven’ bonds to earn less than cash.
o Barclays
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BOND BETAS
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RISK FREE RATES AND REAL RETURNS WHAT ALTERNATIVES ARE THERE?
Real Returns from last Ten years unlikely to repeat for the next Ten.
Source: Centre for Research into Security Prices (CRSP), Barclays
US Asset Returns (1925-2012)
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EMERGING EQUITIES VALUATIONS POINT TO BULLISH IMPLIED GROWTH
Source: Bloomberg, J.P. Morgan, DataStream, MSCI, IBES
GBI-EM Bond Maturity and Yield to Maturity are used for each country.
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THE GREAT MODERATION & THE FAT TAIL
NEW NORMAL OR LOW RISKS/LOW RETURNS?
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MARKET PREFERENCE STYLES EQUITY L/S, MACRO, CREDIT TOP ALLOCATIONS
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Equity Long Short
Macro Credit Event Driven Emerging CTAs
Global
US
EU
Asia
Source: UBS, Lumen
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THE SHORT BOOK TOP 3 SHORTED SECTORS BY SHORT MARKET VALUE (SMV)
0%
4%
8%
12%
16%
20%
US
0%
5%
10%
15%
20%
25%
EU
0%
5%
10%
15%
20%
25%
30%
ASIA
Source: UBS, Credit Suisse, Lumen
L U M E N I N V E S T M E N T S
CROWDED TRADES EMERGING ALLOCATIONS POINT TO ECONOMIC CYCLE
Most Crowded Least Crowded
Colombia Poland
Philippines Czech Rep
Thailand Morocco
South Africa Hungary
Turkey India
Source: UBS, Lumen
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CHINA FUND ALPHAS: LOW DISPERSION OF ACTIVE ALPHAS
Average Monthly Alpha 12 month MA (2001-2013)
Source: Lumen, Bloomberg
L U M E N I N V E S T M E N T S
ASSET ALLOCATION (ALPHA BETA SEPARATION): CHINA ALPHAS LOW CORRELATION TO WORLD BETAS
Correlation of Alphas with China Betas & Global Betas (12 Month Rolling 2001-2013)
Source: Lumen, Bloomberg
L U M E N I N V E S T M E N T S
ALPHA-BETA SEPARATION A WAY OF VIEWING CHINA
Global Beta
China Beta
China Alpha
Global Alpha
China betas and alphas still have diversification benefits but from returns generation and risk budgeting China alphas is a better alternative
L U M E N I N V E S T M E N T S
ASSET ALLOCATION
What we like:
TIPS
o Insurance for risk-on-off trades and hedge against inflation
Latin High Yields
o High Yield: Avoiding negative real yield prospects
o Special Opportunities: Precatorios
Emerging Equity Alphas, US Equity Betas
o Smart Betas and Sustainable Alphas