DOCSLIB.ORG

Are Hedge Funds an Asset Class?

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Are Hedge Funds an Asset Class? Welcome to Today’s NACUBO Webcast Our program will begin shortly with a brief introduction on how to use the desktop interface. Desktop Interface Element Toolbar Media Player Element Display Quick Primary Question Toolbar CPE Credit You must complete surveys to receive CPE credit Resource Page Click directly in the element area to answer survey questions How to Ask Questions • Select “Expert” from the dropdown menu • Type your question • Click on Submit The Online Experts InBox button will illuminate when you receive a response. To view the answer to your question, click on this button and then select “Answered Questions.” Reviewing Elements • To review elements, use the Review and Preview buttons in the Element toolbar. • Click on the Sync button to rejoin the presenter. NOTE: This button appears “unplugged” if you are not synchronized with the presenter. Sync Review Preview Enlarge Buffering • If you experience sustained periods of buffering, click on the Speed button and select a lower stream rate. • Contact the helpdesk at 1-800-354-2665. Speed Button Hedge Fund Investing For Endowments NACUBO Web Cast Part Two Asset Allocation, Hedge Fund Portfolio Construction, Fixed Income Hedge Fund Strategies NACUBO Web Cast Part Two Joint Web Cast Sponsored by: NACUBO and Bear Stearns Moderator: Francie Heller, Bear Stearns Pension, Endowment, and Foundation Services Table of Contents 1. Review of Equity Hedge Fund Investing, Francie Heller 2. Integrating Hedge Funds Into the Asset Allocation Decision, Greg Dyra 3. Hedge Fund Portfolio Creation, Michael Norris 4. Fixed Income Hedge Fund Strategies, Heather Malloy i. High Yield, Leon Wagner ii. Relative Value Arbitrage, John Tsai iii. Emerging Markets, Fran Rodilosso 5. Fixed Income Historical Returns, Francie Heller 6. Summary of Asset Allocation, Greg Dyra 7. Questions 1. Review of Equity Hedge Fund Investing Francie Heller, Senior Managing Director Bear Stearns Pension, Endowment, and Foundation Services Overview of Hedge Funds • What is a Hedge Fund? – A private investment vehicle that seeks above average returns through active portfolio management – There is no statutory or regulatory definition of a Hedge Fund, although many have several characteristics in common Source: SEC, 17 CFR Parts 275 and 279, Release No. IA-2333; File No. S7-30-04, February 10, 2005. Overview of Hedge Funds • What is a Hedge Fund? – Characteristics in Common, cont. • Attempt to generate returns based on a unique skill or strategy the manager has that exploits an inefficiency in a particular area of the markets • Seek non-volatile absolute returns • Utilize short selling, leverage, derivatives, etc. • Organized by professional investment managers who frequently have a significant stake in the funds they manage • Funds have a management fee but compensation is heavily based on performance incentives Source: SEC, 17 CFR Parts 275 and 279, Release No. IA-2333; File No. S7-30-04, February 10, 2005. Equity Hedge Fund Strategies Covered in the Last Session • Long / Short Equity • Multi-Strategy • Equity Market Neutral • Convertible Arbitrage • Risk Arbitrage A Breakdown of Hedge Fund Strategies • Equity hedge fund strategies account for Q4 2006 ~50% of all Hedge Fund AUM Short Selling Convertible Arbitrage • Fixed Income and International strategies 0.29% 3.17% Sector (Total) 5.08% Distressed Securities 4.40% account for an additional ~40% of the Relative Value Arbitrage 13.23% Emerging Markets (Total) Hedge Fund Universe 4.39% Regulation D 0.24% • Sector specific, market timing and Merger Arbitrage 1.55% Market Timing 0.35% regulation D strategies make up the Equity Hedge remainder of AUM Macro 10.93% 28.67% FI: MBS 2.09% FI: High Yield 0.87% FI: Diversified 1.51% FI: Convertible Bonds 0.09% Equity Market Neutral FI: Arbitrage 2.53% Event-Driven 2.90% Equity Non-Hedge 13.55% 4.15% Source: HFR 2006-Q4 Industry Report Equity Hedge Fund Training Survey Results • In which strategy do you expect to make the greatest increase in your allocation? – Multi-strategy 52% – Long/short Equity 28% – Equity Market Neutral 10% – Convertible Arbitrage 7% – Risk Arbitrage 3% 2. Integrating Hedge Funds Into the Asset Allocation Decision Gregory J. Dyra Assistant Treasurer, Vanderbilt University (2004-January 2007) Portfolio Manager, Northwestern University (1996-99) Inv. Operations Manager, Northwestern University (1993-96) What Will We Cover Today? • Hedge fund allocations per NACUBO Endowment Studies • Institutional investment diversification approaches • If you want to be like Yale, you can study Yale – Art of contrarian thinking and patience for long term orientation – Science and limitations of mean variance optimization • Are hedge funds an asset class? – Return dispersion even within hedge fund strategies – Diversification approach can determine answer • Benchmarking choices for hedge funds as an asset class • Cautionary comments from hedge fund investors • Governance alignment, implementation and due diligence Large Endowment Asset Mix Changes Since 1988 1988 1991 1994 1997 2000 2004 2006 US Equity 45.6 45.9 40.2 39.4 32.4 24.6 28.8 Non-US Equity 3.1 6.0 13.5 14.8 13.5 16.5 16.2 Hedge Funds 0.7 2.0 6.4 8.8 11.7 24.4 22.4 Non-Marketable 3.8 5.3 6.2 7.1 18.7 13.3 14 Bonds 33.0 32.0 25.5 20.2 16.6 13.5 12.5 Real Estate 2.9 3.2 3.3 5.4 4.7 5.1 4.4 Cash 10.9 5.6 4.9 4.3 2.4 2.6 1.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: NACUBO Endowment Studies, © 2007 National Association of College and University Business Officers Large Endowment Diversification Produced Relatively Higher Nominal Returns Note: Dollar weighted figures are dominated by larger endowments. Source: 2006 NACUBO Endowment Study, © 2007 National Association of College and University Business Officers Endowment Universe Appears to Follow Large Endowments’ Affinity for Hedge Funds Source: 2006 NACUBO Endowment Study, © 2007 National Association of College and University Business Officers Average Hedge Fund Strategy as a Percentage of Total Hedge Funds Source: 2006 NACUBO Endowment Study, © 2007 National Association of College and University Business Officers Survey Question With the trend toward more hedge funds, do you see your institution’s objectives as: - Increase returns and therefore increase risks - Decrease risk through diversification -Both Institutional Investment Diversification Approaches Source: Greg Dyra Institutional Investment Diversification Approaches Source: Greg Dyra Survey Question What is the size of your endowment? -Mega (> $10 billion) -Large ($1-10 billion) -Mid-size ($0.5-1 billion) -Small (< $0.5 billion) Survey Question What do you feel represents the dominant diversification approach for your organization? -Keep it Simple -Style Diversifiers -Quants -Pioneers Yale’s Investment Process Balances Art & Science “Yale’s portfolio is structured using a combination of academic theory and informed market judgment. The theoretical framework relies on mean variance analysis... investment management involves as much art as science, qualitative considerations play an extremely important role in portfolio decisions. The definition of an asset class is quite subjective, requiring precise distinctions where none exist. Returns and correlations are difficult to forecast. Historical data provide a guide, but must be modified to recognize structural changes and compensate for anomalous periods.” Source: “The Yale Endowment Report: 2006” Art of contrarian thinking and long term orientation Investment Process - “Two important tenets of investment management - contrarian thinking and long-term orientation – create great difficulties for governance of endowment funds.” Investment Committee – “inspires staff to produce ever more carefully considered proposal…informed give and take brings dialogue to a higher level…oversees the investment process and supports the staff, while avoiding actual management of the portfolio.” Investment Staff –“drives the portfolio management process…intellectual dishonesty proves fatal to the investment process…comprehensive written treatments of investment issues…decision-making groups must be small, consisting of no more than 2 to 3 people… spreading power and delegating responsibility improve both performance and professional satisfaction.” Organizational Characteristics –“choose from a broader opportunity set…uncover highly motivated, attractive group of partners… focused mentorship provides essential training for new staff… frank, open discussion of previous failures and successes provides essential feedback for improved decision-making… collegiality plays a critical role.” SouSource: “Chapter 11. Investment Process” of “Pioneering Portfolio Management” by David F. Swensen The Science (and Art) of Absolute Return Mean Variance Optimization Assumptions Historical Capital Modified Expected Risk, Return Nature of Markets Data and Correlation Assumptions Modification Return 17.6% (nominal) 7.0% (real) lower Standard deviation 11.8% 15.0% higher Absolute return correlation to: U.S. equity .28 .30 higher U.S. bonds .15 .35 higher Developed equity .16 .30 higher Emerging equity .36 .30 lower Private equity .29 .25 lower Real estate .06 .40 higher Cash (.08) .00 higher Source: “Chapter 5. Asset Allocation” of “Pioneering Portfolio Management” by David F. Swensen Limitations of Mean Variance Optimization • Measuring the influence of significant, low-probability events, such as skewness or kurtosis, and forecasting the investors’ tolerance for skewness or kurtosis. – Example: Negative skewness is evident in the
Load more

Recommended publications
  • How the SEC Justified Its Decision to Require Registration of Hedge Fund Advisers
    Washington University Law Review Volume 83 Issue 2 2005 Looking Through the Hedges: How the SEC Justified Its Decision to Require Registration of Hedge Fund Advisers Laura Edwards Washington University School of Law Follow this and additional works at: https://openscholarship.wustl.edu/law_lawreview Part of the Legislation Commons Recommended Citation Laura Edwards, Looking Through the Hedges: How the SEC Justified Its Decision ot Require Registration of Hedge Fund Advisers, 83 WASH. U. L. Q. 603 (2005). Available at: https://openscholarship.wustl.edu/law_lawreview/vol83/iss2/5 This Note is brought to you for free and open access by the Law School at Washington University Open Scholarship. It has been accepted for inclusion in Washington University Law Review by an authorized administrator of Washington University Open Scholarship. For more information, please contact [email protected]. LOOKING THROUGH THE HEDGES: HOW THE SEC JUSTIFIED ITS DECISION TO REQUIRE REGISTRATION OF HEDGE FUND ADVISERS I. INTRODUCTION In 1998, the infamous hedge fund, Long Term Capital Management (“LTCM”), collapsed, threatening to bring down the entire global economy.1 Although hedge funds had been dramatically growing in popularity since the early 1990s,2 this was the first major event in an industry that was, and still is, generally seen as an investment vehicle for the very rich and non-risk-averse.3 In the next five years, the hedge fund industry would be the focus of reports by the President’s Working Group on Financial Markets4 (“President’s Working
    [Show full text]
  • Second Draft
    Second Draft Risk, Financial Crises, and Globalization: Long-Term Capital Management and the Sociology of Arbitrage Donald MacKenzie March, 2002 Author’s address: School of Social and Political Studies University of Edinburgh Adam Ferguson Building George Square Edinburgh EH8 9LL Scotland [email protected] Word counts: main text, 16,883 words; notes, 1,657 words; appendix, 142 words; references, 1,400 words. Risk, Financial Crises, and Globalization: Long-Term Capital Management and the Sociology of Arbitrage Abstract Arbitrage is a key process in the practice of financial markets and in their theoretical depiction: it allows markets to be posited as efficient without all investors being assumed to be rational. This article explores the sociology of arbitrage by means of an examination of the arbitrageurs, Long-Term Capital Management (LTCM). It describes LTCM’s roots in the investment bank, Salomon Brothers, and how LTCM conducted arbitrage. LTCM’s 1998 crisis is analyzed using both qualitative, interview-based, data and quantitative examination of price movements. It is suggested that the roots of the crisis lay in an unstable pattern of imitation that had developed in the markets within which LTCM operated. As the resultant “superportfolio” began to unravel, arbitrageurs other than LTCM fled the market, even as arbitrage opportunities became more attractive. The episode reveals limits on the capacity of arbitrage to close price discrepancies; it suggests that processes of imitation can involve professional as well as lay traders; and it lends empirical plausibility to the conjecture that imitation may cause the distinctive “fat tails” of the probability distributions of price changes in the financial markets.
    [Show full text]
  • JWM Losses Result in Job Cuts by Mark Ginocchio Staff Writer Article Launched: 05/03/2008 02:44:47 AM EDT
    JWM losses result in job cuts By Mark Ginocchio Staff Writer Article Launched: 05/03/2008 02:44:47 AM EDT Struggling Greenwich Hedge Fund JWM Partners LLC, run by ex-Long-Term Capital Management LP chief John Meriwether has terminated nearly 20 percent of its employees and has allowed investors to exit one of its funds, firm officials confirmed this week. At least 15 JWM employees across all departments were notified of their termination last week, according a spokesman at Rubenstein Associates, a firm that represents the hedge fund. A number of JWM's strategies have been hit hard with losses since the beginning of the year. The $1 billion Relative Value Opportunity fund is down about 24 percent since January, and the $300 million global macro fund has lost about 14 percent this year, according to published reports. In order to get "better knowledge of its investors intentions," JWM has accelerated the redemption rights of its global macro investors so the hedge fund could begin trading again, the Rubenstein spokesman said. Typically, hedge fund managers will lock up investors' money for long periods before allowing them to redeem. JWM's five-year-old global macro fund makes bets on currencies, stocks and bonds. Meriwether, who founded JWM, ran $4 billion Greenwich fund Long-Term Capital before it collapsed in 1998 after Russia defaulted and investors turned to the safety of U.S. treasuries, driving down the value of the fund's bets. Despite being associated with a manager that has now struggled with two different hedge funds, financial service recruiters said the laid-off JWM employees will likely get picked up.
    [Show full text]
  • Quantitative Investments
    Quantitative Investments Dale W.R. Rosenthal1 1 June 2018 Q36 [email protected] Dale W.R. Rosenthal Quantitative Investments 1Jun2018 1 / 39 Recall Last lecture we discussed investment management companies. Types of Investment Companies; Types of Investment Funds; Costs and Taxes; and, Issues and Controversies. Today we will talk about crises. Q36 Dale W.R. Rosenthal Quantitative Investments 1Jun2018 2 / 39 Crises Chapter 26, A Quantitative Primer on Investments with R Q36 Dale W.R. Rosenthal Quantitative Investments 1Jun2018 3 / 39 Introduction This part discusses crises. Specifically: Theory: Bubbles, Transmuters of Trouble; Pre-Modern Problems; LTCM Mini-case; Great Financial Crisis of 2008; European Sovereign Debt Crisis; Chinese Stock Market Meltdown of 2015; The Dogs Which Did Not Bark; and, Recovery and Reform. Q36 Dale W.R. Rosenthal Quantitative Investments 1Jun2018 4 / 39 Theory Q36 Dale W.R. Rosenthal Quantitative Investments 1Jun2018 5 / 39 Bubbles A bubble is a growth in prices beyond fundamental value. However, we often associate additional phenomena w/bubbles: rapid price appreciation; speculation assuming continued price appreciation; widespread acknowledgement that prices are high; claims that \this time it's different;” and, hype like \you can't afford not to own this!" Why do we care? Often attract malinvestment: Overinvest in over-valued industries. May attract a lot of capital. Bubbles eventually \pop" =) widespread losses, recession. Q36 Dale W.R. Rosenthal Quantitative Investments 1Jun2018 6 / 39 Detecting Bubbles There are a wide variety of methods attempting to detect bubbles. Divergence from Fundamental Value: Market price − DCF price with growth, later fundamental value. Strict Local Martingale Test: Look at E(p=σ^2(p)) over [t; τ] as τ ".
    [Show full text]
  • Markets, Arbitrage and Crises
    To be presented at London School of Economics, Centre for the Analysis of Risk and Regulation: Workshop on Organisational Encounters with Risk, May 3-4, 2002. Mathematizing Risk: Markets, Arbitrage and Crises Donald MacKenzie April, 2002 Author’s address: School of Social and Political Studies University of Edinburgh Adam Ferguson Building Edinburgh EH8 9LL Scotland [email protected] Two moments in the financial history of high modernity: Monday, August 17, 1998. The government of Russia declares a moratorium on interest payments on most of its ruble denominated bonds, announces that it will not intervene in the markets to protect the exchange rate of the ruble, and instructs Russian banks not to honour forward contracts on foreign exchange for a month. Elements of the decision are a surprise: countries in distress usually do not default on domestic bonds, since these can be honoured simply by printing more money. That Russia was in economic difficulties, however, was well known. Half of its government income was being devoted to interest payments, and investors – some fearing a default – had already pushed the yield on GKOs, short-term ruble bonds, to 70% by the beginning of August. Nor is the news on August 17 entirely bad: Russia manages to avoid a default on its hard currency bonds. And Russia, for all its size and nuclear arsenal, is not an important part of the global financial system. “I do not view Russia as a major issue,” says Robert Strong of Chase Manhattan Bank. Wall Street is unperturbed. On August 17, the Dow rises almost 150 points.1 Tuesday, September 11, 2001.
    [Show full text]
  • The Material Sociology of Arbitrage
    Edinburgh Research Explorer The Material Sociology of Arbitrage Citation for published version: Hardie, I & MacKenzie, D 2012, The Material Sociology of Arbitrage. in K Knorr Cetina & A Preda (eds), The Oxford Handbook of the Sociology of Finance: Oxford Handbooks in Business and Management. Oxford University Press. https://doi.org/10.1093/oxfordhb/9780199590162.013.0011 Digital Object Identifier (DOI): 10.1093/oxfordhb/9780199590162.013.0011 Link: Link to publication record in Edinburgh Research Explorer Document Version: Peer reviewed version Published In: The Oxford Handbook of the Sociology of Finance General rights Copyright for the publications made accessible via the Edinburgh Research Explorer is retained by the author(s) and / or other copyright owners and it is a condition of accessing these publications that users recognise and abide by the legal requirements associated with these rights. Take down policy The University of Edinburgh has made every reasonable effort to ensure that Edinburgh Research Explorer content complies with UK legislation. If you believe that the public display of this file breaches copyright please contact [email protected] providing details, and we will remove access to the work immediately and investigate your claim. Download date: 02. Oct. 2021 The Material Sociology of Arbitrage Iain Hardie and Donald MacKenzie “Arbitrage” is a term with different meanings, but this chapter follows market practitioners in defining it as trading that aims to make low-risk profits by exploiting discrepancies in the price of the same asset or in the relative prices of similar assets.1 A classic example historically was gold arbitrage. If the price of gold in Saudi Arabia exceeds its price in New York by more than the cost of transportation, arbitrageurs can profit by buying gold in New York and selling it in Saudi Arabia (or vice versa if gold is cheaper in Saudi Arabia).
    [Show full text]
  • Inside Wall Street's Culture of Risk
    Inside Wall Street's Culture Of Risk http://www.businessweek.com/print/magazine/content/06_24/b3988... Close Window JUNE 12, 2006 COVER STORY Inside Wall Street's Culture Of Risk Investment banks are placing bigger bets than ever and beating the odds -- at least for now On the 31st floor of a skyscraper overlooking Times Square one recent spring day, a dozen or so of Lehman Brothers Inc.'s (LEH ) top executives filed into a conference room to run through risks, relive past financial crises, and worry about new ones. They analyzed how much money the firm might lose if the markets were buffeted like they were after the terrorist attacks of 2001. They pored over complicated risk models showing how tens of thousands of trading positions and financial contracts with clients would fare in the event of an Avian flu epidemic. They tested all conceivable scenarios that might put Lehman in harm's way. "We are in the business of risk management 24/7, 365 days a year," says Chief Administrative Officer David Goldfarb. Wall Street has always been about taking risk. But never has the "R" word been such an obsession for the men and women who rule the nation's biggest investment banks. Never have they had to reconcile so many bets made on so many fronts. The conditions have been ripe. Historically low interest rates and relatively calm markets in the last few years have allowed a new type of firm to flourish, one that acts primarily as a trader and only secondarily as a traditional investment bank, underwriting securities and advising on mergers.
    [Show full text]
  • An Engine, Not a Camera Studies of Science and the Institute for Scientific Information, for Career Contributions to the Field of Science Studies
    MacKenzie_jkt.qxd 3/30/06 1:27 PM Page 1 economics/science, technology, and society Donald MacKenzie is Professor of Sociology (Personal Chair) at the University of Edinburgh. He was the winner of the 2005 John Desmond Bernal Prize, awarded jointly by the Society for Social An Engine, Not a Camera Studies of Science and the Institute for Scientific Information, for career contributions to the field of science studies. His books “In one lifetime modern finance theory has revolutionized the arts of canny include Inventing Accuracy (1990), Knowing Machines (1996), and investing. MacKenzie knows this exciting story, and he tells it well.” How Financial Models Shape Markets Mechanizing Proof (2001), all published by The MIT Press. Portions Paul A. Samuelson, MIT, Nobel Laureate in Economic Sciences (1970) An Engine, Not a Camera of An Engine, Not a Camera won the Viviana A. Zelizer Prize in . economic sociology from the American Sociological Association. “Having returned from an audacious incursion into the black box of modern How Financial Models Shape Markets financial markets, Donald MacKenzie shows how economic theory has succeeded in capturing and shaping them. This book will be of substantial interest to specialists in a range of fields including economics, finance theory, Donald MacKenzie economic sociology, and science and technology studies. But MacKenzie’s tour An h de force is to make clear, even to nonspecialists, that through complex tech- Engine, DDoonnaallddMMaaccKKeennzziiee nical issues, alternative forms of economic organization can be imagined and Not a In An Engine, Not a Camera, Donald MacKenzie argues that the discussed.” Camera emergence of modern economic theories of finance affected Michel Callon, Ecole des Mines de Paris financial markets in fundamental ways.
    [Show full text]
  • Hedge Fund Conference
    MILAN, JUNE 28TH 2001 TEATRO DAL VERME VIA SAN GIOVANNI SUL MURO, 2 HEDGE FUND CONFERENCE ORGANISED BY BORSA ITALIANA SPA WITH THE CONTRIBUTION OF ERSEL HEDGE SGR SPA, INVESCLUB SGR SPA, KAIRÓS ALTERNATIVE INVESTMENT SGR SPA, MERRILL LYNCH, PIONEER ALTERNATIVE INVESTMENT MANAGEMENT LTD. BORSA ITALIANA HAS ORGANISED THIS CONFERENCE TO PRESENT THE NEW OPPORTUNITIES DERIVING FROM THE START UP OF A DOMESTIC HEDGE FUND INDUSTRY TO IMPORTANT DECISION MAKERS OF THE ITALIAN AND INTERNATIONAL FINANCIAL COMMUNITY. BANCA D’ITALIA HAS RECENTLY ISSUED A NEW REGULATION ALLOWING HEDGE FUNDS TO BE ESTABLISHED IN ITALY. THE REGULATION OFFERS A GREAT OPPORTUNITY BOTH FOR THE GROWTH OF THE ALTERNATIVE FUND INDUSTRY IN ITALY AND FOR THE DEVELOPMENT OF THE RELATED FINANCIAL SERVICES. THE MORNING SESSION AIMS AT DESCRIBING THE ROLE OF HEDGE FUNDS IN THE FINANCIAL SYSTEM AND THE MAIN TRENDS OF THE INDUSTRY. THE AFTERNOON WILL FOCUS ON ITALY AND EUROPE. HEDGE FUND CONFERENCE - MILAN, JUNE 28TH 2001 TEATRO DAL VERME REGISTRATION AND WELCOME COFFEE 8.30 A.M. Morning Session 9.00 A.M. -1.30 P.M. Angelo Tantazzi Borsa Italiana Spa Massimo Capuano Borsa Italiana Spa John Bader Halcyon Offshore Management Company LLC Tanya Styblo Beder Caxton Associates LLC John Meriwether JWM Partners LLC Mark Rzepczynski John W. Henry & Co. Inc. Myron Scholes Oak Hill Platinum Partners Raffaele Jerusalmi Borsa Italiana Spa Bruno Bianchi Banca d’Italia LUNCH 1.30 – 2.45 P.M. Afternoon Session 2.45 - 6.00 P.M. Domenico Santececca ABI (The Italian Banks Association) Giovanni Barbara Legal and Tax Partner of KPMG International Antonio Foglia Banca del Ceresio Crispin Odey Odey Asset Management Christopher Petitt Coast Asset Management Fabio Savoldelli Merrill Lynch Investment Managers Discussion Panel Chaired by: Robert Hanna, Merrill Lynch Paolo Basilico Kairós Alternative Investment SGR Spa Fabio Gallia Ersel Hedge SGR Spa Alberto La Rocca Pioneer Alternative Investment Management Ltd Paolo Catalfamo Invesclub SGR Spa COCKTAIL 6.00 PM SIMULTANEOUS TRANSLATION IS PROVIDED John M.
    [Show full text]
  • The Crisis of Crowding
    JWBT729-fm JWBT729-Chincarini Printer: Yet to Come June 19, 2012 22:16 Trim: 6in × 9in ib JWBT801-FM JWBT801 Printer: Yet to Come July 27, 2012 22:14 Trim: 6in × 9in Additional Praise for TheCrisisofCrowding “What causes systemic risk in economic markets? What are the signals that there could be problems? How do you prevent systemic risk? And how should we change our risk management practices to take this risk into account? Chincarini looks at the financial crises of the past 15 years—starting with a comprehensive analysis of the Long-Term Capital Management crisis in 1998 and ending with the Euro-debt crisis of 2012—and argues convincingly that the central risk in these crises was accentuated from within the financial system rather than from external economic forces (it includes the best analysis I have read on the LTCM crisis). This bold new theory has important implications for both industry practices as well as for new regulations. It is essential that we learn the lessons from the past (or else we will repeat the same mistakes). Chincarini’s book should be required reading for anyone who wants to understand and help prevent financial crises.” —Eric Rosenfeld, Co-Founder of Long-Term Capital Management and JWM Partners “Chincarini connects the dots between LTCM, mispriced risk, the 2008 financial crisis, the flash crash, and the Greek debt crisis. The instability created by crowded trades, interconnected financial institutions, and too much debt is the recurring theme. For those interested in understanding the quantitative approach to investment, the section of the book focused on LTCM is a very useful reference.
    [Show full text]
  • Janus Capital Management LLC | Form ADV Part 2A & 2B
    Retail Advisory Client Relationship Summary March 31, 2021 Janus Capital Management LLC is an investment adviser registered with the Securities and Exchange Commission (SEC). The services and fees of investment advisers differ from those of brokerage firms. It is important for you to understand those differences. There are free and simple tools available to research firms and financial professionals at Investor.gov/CRS, which also provides educational materials about brokerage firms, investment advisers, and investing generally. What investment services and advice can you provide me? We offer investment advisory services to eligible retail investors through private funds and separately managed accounts, including certain wrap fee programs (“SMA programs”) for which we act as an investment adviser. In general, you must be a qualified purchaser or accredited investor to become a client or invest in our private funds. Your eligibility will depend on the type of account and the account minimums applicable to that type of account. $100,000 for an account in a “single contract” SMA program . $1 million for an account in a “dual contract” SMA program . $1 million to $20 million to invest in a private fund . $10 million to $100 million for a traditional separately managed account We generally only provide investment advice to retail investors where we have full discretionary authority. That means that we are permitted to select and trade investments in your accounts without first obtaining your permission. Where we have such authority, we will review, evaluate and trade your accounts on a continuous basis as part of our standard services, absent a different agreement.
    [Show full text]
  • Long-Term Capital Management
    Long-Term Capital Management Michael Kaplan, Will Shao, and Clark Zhang November 23, 2015 Table of Contents Section Introduction and History I Trading Strategies II Causes of Collapse III Bailout and Consequences IV Q&A 1 I. Introduction and History Introduction Long-Term Capital Management was a hedge fund founded by John Meriwether Employed many trading strategies based on leverage and convergence trades Achieved terrific returns on investment in early years leading to significant exposure to major counterparties in the financial system Series of macroeconomic crises resulted in significant loss of capital in the late 1990’s Eventually bailed out by a consortium of banks organized by the Federal Reserve of NY 3 Before LTCM John Meriwether Profile John Meriwether headed Salomon Brothers’ bond arbitrage desk until resigning in 1991 amid a trading scandal – Group accounted for >80% of firm’s total revenue Looked to hire smart traders who treated markets as intellectual discipline: “quants” John Meriwether Exposed market inefficiencies – Over time, all markets tend to get more efficient, allowing his desk to exploit profit on the spread between riskier and less risky bonds Salomon Brothers Building 4 Introduction to Hedge Funds Privately and largely unregulated investment vehicles for the rich Originally based on premise of “hedging” a bet – Limit the possibility of loss on a speculation by betting on the other side 215 hedge funds existed in 1978, while >3,000 hedge funds were active by 1990 Concentration on “relative value” by betting on spreads between pairs of bonds – Example: If interest rates in Italy were higher than in Germany, a trader who invested in Italy and shorted Germany would profit if this differential narrowed Leveraged the firm up to 30x with borrowed capital at a low cost Convergence Trade: Find securities that are mispriced relative to one another and take long positions in the cheap ones and short positions in the overpriced ones.
    [Show full text]