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Monday, 11 July 2016

Absolute Return: Alternative Investments for Today's Markets?

 The Case for Absolute Return

Talk about diversification comes cheap. Actually diversifying one's portfolio is far more difficult.

We have been preaching for some time that in an era where both stocks and bonds may be expensive, investors may want to embrace alternative investments. I have been quoted saying that unless investors have at least 20% in alternative investments, they may not be truly diversified. While that quote made some headlines at the time, many college endowments have a far greater allocation to alternatives, at times more than half of their portfolio. There may be a good reason for that; let me elaborate and make a case why, in this context, investors may want to consider absolute return investing.

Goal of Diversification

Diversification is at times described as the one free lunch Wall Street has to offer: by adding a return stream with low correlation to other investments, risk-adjusted returns might be enhanced. While it's theoretically possible to enhance risk-adjusted return with an asset that has negative returns, I have yet to meet investors embracing an investment with expected negative returns merely for its correlation attributes.

Alternative Alternatives

Not all alternatives are created equal. The simplest alternative investment may be gold. Maybe because it's ‘merely' an unproductive shiny metal, our analysis has shown that it historically has exhibited a very low correlation to equities and, as such, warrants evaluation as a good diversifier. The volatility in the price of gold tends to be closer to be that of equities (at times lower; at times higher). Yet gold may be the least volatile commodity; we believe that's because of the comparatively low industrial use, making its dynamics less complex.

Pokémon Go Is a Government Surveillance Psyop Conspiracy  

As TechCrunch explained, Pokémon-loving millennials are far less likely to object to a few extra permissions when its Squirtle staring them in the face as they abandon their every god-given freedom than they do when Google reads their email.

The Fed recently released a paper entitled “‘Low-for-Long’: Interest Rates and Net Interest Margins of Banks in Advanced Foreign Economies” that considers precisely this question. The study looked at bank profitability in advanced financial economies during low- and high-rate environments between 2005 and 2013.
A low-rate environment was defined as a time when a country’s three-month sovereign bond yield was 1.25% or below, while a high-rate period was when that yield was above 1.25%.

Weak oil and nickel prices and a poor sugar harvest have contributed to Cuba’s woes, officials said. Venezuela’s economic agony has led many Cubans to wonder how much longer their oil-rich ally will continue to supply the island with crucial oil — especially if the government of President Nicolás Maduro falls.
Those fears grew last week after Mr. Murillo warned of blackouts and state workers were asked to cut their hours and sharply reduce energy use.

Controversy over Saudi oil reserves

Rystad Energy, a small Norwegian oil and gas data firm released a contentious study several days ago, which concluded the US held more recoverable oil reserves than both Saudi Arabia and Russia. Although Rystad underlined that “more than 50 per cent of remaining [American] oil reserves is unconventional shale oil,” with an estimated 60 billion barrels in Texas alone, serious environmental and health risks were associated with their extraction. Still, the report raised highly controversial points about Saudi holdings, and opined that Riyadh will not be able to extract and export its black gold for very long. 

The question was not new, and while many wondered whether Saudi Arabia would soon run out, this was mostly fiction. Of course, state secrecy meant that few outsiders knew with any degree of accuracy what the country’s actual reserves were, and what were the correct total production levels to date. According to […]

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