INVESTMENT

Brief, index, and personal market


The gamestop story has brought short sellers back to the front pages of global financial newspapers. The Reddit crowd’s “Main Street takes revenge on Wall Street” portrays these shortsellers as financial market villains. This has created enough sensible buying pressure to hold their positions on margin calls and realize the loss.

But my focus here is not the gamestop story. Rather, it requires both small positions and representative, investable criteria for private market investment.

Cash king.

I admit early in my career that I saw nude short positions as a noisy and annoying element of the market. But I was confident that the market would discover a fair price and that fair price would become the transaction price.

Trained as a long-time investor, I had a fixed income quantity concept, balanced economy and efficient pricing model, and when I first ventured into the fundamental analysis of equity investing in corporate finance and the public market, I described equity stories and entrepreneurship. At the time, I unequivocally believed that pure speculative short positions, which sought to profit from a company’s misfortune, had some – yes, I say – unethical material.

Later, the equity market taught me about investing in real life and I soon realized the important and courageous role of playing shorts. Price is a goal, an expectation, the result of the best possible judgment process. But the price you pay or receive in the actual transaction is the only purposeful element that matters. Cash king of permanent transactions. The rest is opinion.

Small sellers are a serious breed of investors. They borrow shares and sell out of trust. On the reasonable time horizon, they believe that the price they have to pay to close their position will bear the cost and achieve the target. Perseverance is the key. Ability to wait for time to pass, critical execution variable. If you don’t think something can finance a good hedge or a good hedge against another investment in relative terms – in the long-term – and trade – then you sell it. Beard.

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Talking is cheap.

What does the index have to do with short sales? If the indicators are investable, investors have the option to buy and shorten an asset class. This means that the indicators are representative of the asset class or sub-allocated within it. This means that taking a long or short position on an index creates a natural hedge to complement or create a well-diversified portfolio.

Of course, this applies not only to top-down, macro long-short situations, but also to any strategic adjustment of existing asset allocations.

What makes an index investable and representative? According to the accepted theory, a representative criterion must meet the seven requirements included in the investment. Car:

  1. The assessment period is fixed before the start.
  2. Appropriate, consistent with investors ’investment style.
  3. Measurable and easily calculated on a reasonable frequent basis.
  4. Undoubtedly, so that the identity and weight of its components are clearly defined.
  5. Reflect current investment opinion.
  6. Owned, so that adequate accountability can be provided.
  7. Investable: In other words, it is possible to indifferently hold the benchmark or its components.

The practice of financial markets and the control of the European Union is a financial instrument, or an asset allocation defining or measuring performance fees.

Outside of these boundaries, the concept of benchmarking loses gravity. All other products that simply define criteria should be re-ateg classified in metrics for peer-group comparison because they lack the formal formalities required for a valid benchmark definition. If an investor cannot regularly use the relative value indicator of a benchmark index, then that indicator does not meet the utility requirements and is a mere posthumous exercise. Talking is cheap.

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Money speaks.

Private equity (PE) is a perfect example of an asset class for which all currently used criteria should be redefined. These are metrics for peer-group comparisons and relative value analysis ratios. There are no valid criteria for the unlisted PE industry, none of which provide vague performance assessments or provide adequate market risk management of investment portfolios.

For this reason, the discussion of PE returns is more of an argument than a proper performance appraisal practice among football fans. And I’m not just referring to future expectations, which are based on construction, subjectivity and assumptions. I want to say past and present returns, which should be pre-post concepts that leave no room for ambiguity or subjectivity. And yet they do.

Why is an industry performance appraisal of management under trillion assets (AUM) still so elusive? Industry metrics report significant absolute return and outperformance margins while academic studies provide different evidence. None of the metrics currently used accurately calculate the average performance of the industry.

I am proposing an objective solution. Anyone discussing the outstanding performance or underperformance of a listed private equity asset class, or its sub-sector, should adjust their financial interests to their judgment and eat their own cookies. Will they buy or sell their “benchmark” settings ahead? Will their criteria be commercial? Money, after all.

I support the creation of a benchmark index that actually represents the actual allocation of listed private funds and which adheres to the underlying theory and complies with regulatory requirements. The only objective criterion that indicates any such practice is the short trade challenge that I am proposing. If an investor summarizes the physical components of the index – unlisted PE funds – and the index, the hedging position depends on the accuracy of the match and the costs associated with the holding, so the net position should be zero or reasonably close. Individual index elements.

I have not found any such device in the market today. This is a void that needs to be filled.

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In whose interest?

The trend of industrial development is clear. It points to democracy. It refers to the concept of product suitability.

Any investor can understand and verify the return on PE expectations parameters in the interest of both the general partner and the investor. That reference price should be provided in the benchmark market. Such criteria have historically contributed to the significant market growth of the asset class created to represent them.

They can do the same for personal equity. That is why it is in everyone’s interest to make them.

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

Image Credit: © Getty Images / Primeimages


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Massimiliano Saccon, CFA

Massimiliano Saccon, founder and CEO of CFA, XTL Strategy, is developing a Fintech SME innovative private market index and a platform for risk-shifting solutions. He has developed and patented a private equity performance valuation system, is a former member of the GIPS Alternative Strategies Working Group at the CFA Institute and author of the Alternative Investment Guide for CFA Society Italy. Saicon’s global alternative investment manager at AIG Investments (now Pinebridge) has pioneering experience in alternative retail, where he was managing director and global head of multi-alternative strategies and formerly regional head of Southern Europe. Prior to that, he was head of institutional portfolio management at Deutsche Asset Management Italy (now DWS). He is a CFA charterholder and a qualified accountant and auditor in Italy, has a master’s degree in international finance from the University of Collegio Boromio and Pavia, and a cum laude degree in economics from the University of Rome La Sapienza. He is a lieutenant in the Guardia de Finanza Reserve, an Italian financial law enforcement agency.



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