The following is an excerpt from the snapshot podcast summary of the editor of the latest issue of the CFA Institute Financial Analyst Journal. Institutional clients and logged-in CFA Institute members have full access to all articles.
What’s in the CFA Institute Financial Analyst Journal 2021 Third Quarter Issue?
Contributions explore Volmagadon, American Depository Receipts (ADRs), soft commissions, carbon emissions, the end of the hedge fund era, and the predictability of bonds.
But first, Andew Lo helps to celebrate JournalThe first 75 years of “The Financial System Tooth and Clove: 75 Years of Co-Evolving Markets and Technology”. Lowe is well known for his “Adaptive Markets Hypothesis” and here he reflects on the adaptation or evolution of financial practice with technology. He defined eight eras of financial evolution from 1945 to the present, each mapping against the technological advances of each era as well as against financial and regulatory milestones. From Bretton Woods to Bitcoin, he charts how we got here and explores what lies ahead.
The nickname “Volmagadon” for the market crash of short volatility strategies on 5 February 2018 that caused the death of some reverse VIX exchange-traded products in the United States and continues to teach us today. Patrick Augustine, Ing-Hao Chen, and Ludovic van den Bergen walk the reader through the steps of the negative feedback loop in “Volmegadon and the short volatile product failure” that Volmagadon creates and markets when displaying hedge and leverage losses. Condensation and instability spike.
For those who want to go deeper, from the first quarterly edition of this year, Colby J. Pesina and Robert E. Journal, Makes for a good companion reading.
The ADR allows U.S. investors to participate in foreign equities in the U.S. market and enables foreign companies to cross-list in a way that reduces their capital costs. For firms in markets like China where IPO law can be complicated, ADR can be an interesting option. But they are not without controversy. In “Chinese and Global ADR” the authors review the ADR performance of firms around the world from 1950 to the present and provide an excellent introduction to the extent, history and diversity of ADR. Investors have enjoyed significant performance advantages and diversification through this market, especially in the case of Chinese firms. But researchers have expressed concern that among other laws, the “Holding Foreign Companies Accountability Act”, in particular, could limit the future of the Chinese ADR.
Legally speaking, MiFID II has been in force in Europe and in some cases for more than three years Again-Bundling law will come into force next year. Soft commissions, or summaries of implementation and research, have been debated and legislated over the years. “To bundle or not to bundle? Soft Commissions and Research Unbounding Review They report a sens reduction so far about the agency conflict and the cost of bundling in the literature. Post-MIFID law research in Europe, collectively indicates higher research standards but reduces research coverage. But it also highlights the difficulties of cross-border broking, presents conflicting results on the impact of unbanding on smaller firms, and predicts mixed models in the future. It provides an excellent chit sheet of all the work done on soft commissions so far: consent and conflicts have been nicely summarized with recommendations on the way forward.
Unbundled, let’s decarbonize! The authors at Harvard and State Street analyze in “Decarbonizing Everything” how different portfolio carbon outcomes and risk-adjusted earnings are generated using different climate risk systems. They explain the origins, strengths and weaknesses of different types of carbon metrics: opportunities 1, 2 and 3 emissions, operational emissions, total value chains, analysts ratings, and so on. Long and short portfolios combine different metrics. Their results are enlightening, especially in the sector or industry line and especially for investors and managers who want to manage climate risk in portfolio building.
The issue ended with some bad news about hedge funds and good news about bonds. “Hedge Fund Performance: The End of an Era?” Nicholas PB Bollen, Juha Joenväärä, and Mikko Kauppilad show that the effectiveness of hedge funds has taken a really bad turn since 2008. Overall performance across the fund has declined. Moreover, the ability of the established model to select hedge funds did not help investors much. The authors examined a number of different theories and concluded that post-2008 reforms and central bank intervention were potential turning points. Their advice for investors? Calibrate the expectations from the hedge fund from here.
The good news is that government bonds are predictable and therefore worth the effort for an active manager. Guido Baltusin, Martin Martens and Olaf Penninga, contributors to Robeco’s “Bond Return Predictions: 70 Years of International Evidence,” have been testing bonds in the world’s major markets for much longer than other studies. They show strong results in very tradable strategies with all the details for copying. They blame the premium available for managing active bond funds not for market or macro-economic risk, not for transaction costs or other investment friction, but for market inefficiency.
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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.
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