Companies often denigrate products sold by competitors, so it isn’t surprising that Alliance Bernstein is warning that the growth of so-called “risk parity” strategies is akin to the growth of the dreaded “portfolio insurance” in the 1980s — and could similarly make “the system more fragile”.
We’re sceptical. Ben Inker of GMO wrote up a more thoughtful critique a few years ago, although it also contains some important errors. More broadly, there is a common misconception that these investment products are uniquely vulnerable to rising interest rates, relative to more traditional portfolios. Our colleagues in the Markets section have a good overview.
While we don’t want to defend every investment product that markets itself as “risk parity”, since there are plenty of differences between them, we think we can usefully clear up some misconceptions and explain why these strategies make sense for certain kinds of investors. Read more
The results of the ECB’s Asset Quality Review are in. As ever it was the taking part that counted, we’re all winners here. Were you minded to look for losers, however, here’s the FT:
Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector.
Nine Italian lenders fell short, out of 25 banks mainly in Europe’s periphery and Germany that need more capital following the stress tests. The general reaction, however, seems to be that the whole exercise is credible, without unpleasant surprises, and that we really need to talk about lending. Read more
Are you sitting comfortably? Too comfortably, perhaps?
Huw van Steenis isn’t. He’s come back from Davos with the feeling that while banks have got ahead of europe-wide stress tests by raising capital (€25bn, in fact, he calculates) he is far from relaxed about the consequences of the Asset Quality Review. Read more
Glimmers of hope in Spain, which has adjusted its economy (cut labour costs) and is peering around the corner of recovery. Credit Suisse has sufficient confidence to upgrade its views on some of the banks.
They would now buy Caixabank and Popular, while Sabadell gets a reprieve from the sell list.
We see Spanish banks approaching a ‘turnaround’ in the earnings cycle after material progress in terms of funding, capital and Non Performing Asset recognition, and with superior operating leverage adding appeal to the story…
OK, one country can print in its own currency, while the other can’t. There is also no suggestion of an intimate circle of support in the US by which banks and the government prop each other up (as that’s what the Federal Reserve is for).
But after the FT’s story that the ECB is poised to get tough on Sovereign Bond Risk, an interesting chart arrives from Huw Van Steenis and the Morgan Stanley banks team: Read more
The European asset quality review is on its way! Or at least details of how the ECB plans to run the so-called AQR are due this month. We expect fine tooth combs, desk lamps in faces and penetrating stares.
But, as the Economist explains, it is not a stress test. That would be all about simulating disaster to spot it in advance. Read more
AQR Capital Management – the quantitative hedge fund group run by former Goldman trader Cliff Asness – has been forced to shelve plans for an IPO.
According to the New York Post, AQR saw several large investors pull money from the firm’s flagship $38bn fund after it posted poor figures for October. The AQR Absolute Return fund dropped 3 per cent in the last month, down 6 per cent on the year. Read more
Renaissance Technologies, the $30bn hedge fund run by billionaire mathematician James Simons, is considering selling a minority stake to a big outside investor or group of investors in coming weeks. The move suggests that Renaissance may believe the crisis in the US credit markets will be short-lived. This bullishness comes as hedge fund groups such as AQR and private equity firms including KKR are proceeding cautiously with planned IPOs. The Renaissance group said it has no current plan to sell a stake or stakes, and is said to be considering direct stake sales similar to those being considered by SAC Capital.
Thanks to Dealbreaker, another explanation from the computer-loving horse’s mouth. It’s AQR’s missive to investors.
August 10, 2007 Read more
With the backdrop of widespread market turmoil, it looks a brave move. Just as the Times was reporting that nearly $38bn of planned US floats are hanging in the balance, AQR, one of the world’s largest hedge funds, is looking to raise $500m in an IPO.
The FT reports that AQR plans to sell about 10 per cent of the firm in a listing, valuing it at $5bn. Scheduled for today, an SEC filing might yet fail to materialise, the story adds. Read more
JPMorgan and Goldman Sachs have lined up key roles advising Apollo Management on its expected IPO, the first signs of a comeback by other Wall Street banks after the early dominance of Morgan Stanley and Citigroup in the battle to underwrite private equity floats. Apollo is expected to sell shares to the public and a minority stake to an investor. Goldman is also said to be a lead underwriter for AQR, the hedge fund group expected to file for an IPO in the coming weeks.