Further adventures in sovereign wealth fund knife-catching — of a sort.
We’ve noted before that equity volatility has hampered sovereign wealth fund returns a tad lately. Tuesday’s WSJ offered a glimpse of a potential flip-side to this — SWFs buying protection on even worse reiterations of that volatility.
China Investment Corp going cap in hand to Nassim Taleb for a product hedging against extreme inflation, say. Felix Salmon explains the possible motive here pretty well:
The thesis of the Black Swan Protection Protocol is that the risk of chaotic inflation is underpriced, so it makes sense to hedge that risk now, when doing so is cheap. That doesn’t mean that anybody is hoping for chaotic inflation. It just means that clients — who might soon include China’s sovereign wealth fund — sensibly want to be able to protect their portfolios across a wide range of possible outcomes, even if none of them rises to the level of being a probable outcome. And even if — especially if — many of those outcomes are things you devoutly hope will never happen.
Fair enough. But… there are two odd things we’d point out here though, or at least things that matter as context.
First, there exist more than a few inflation hedges in CIC holdings already, such as moves into property, plus a smattering of resource stocks, not to mention commodities. Actually, this has been the fund’s declared strategy since October last year. All rather sensible.
But while you could by all means pipe money to Universa, the fund advised by Taleb, so that it can buy up out-of-the-money put options on assorted US stocks n’ stock indices, losing money all the while unless you hit big — well, this seems a bit less sensible in light of that strategy.
If you must diversify into tail risk, you’d make far more money selling it, as Eric Falkenstein once noted directly contra Taleb, and as John Kemp again observed on Monday. Fancy doing that? Just buy a few insurers.
So perhaps what this episode shows is that CIC simply isn’t a very good asset manager yet – except that it seems to be casting about for ways to start actively managing equities.
The crisis-era adventure with Morgan Stanley affords a case in point for why improvements are needed. Then there are recent reports that CIC may mandate a Chinese asset manager for its overseas assets.
Of course, we could go further, and develop a bit more on our theme that sovereign wealth funds are turning ever more into giant hedge funds in terms of the strategies they’ll take to establish relatively high returns in equities — New Zealand’s SWF having taken a particularly brute approach to the issue recently.
But we’ll stop there. Because the meeting of CIC and Taleb is very odd indeed, when you think about it.
Related links:
Of fat tails and mean reversion – FT Alphaville
Nassim’s selective returns – Falkenblog
After BHP bid, Potash white knight may be in China – Reuters
Party faithful, your sovereign wealth fund needs you – FT