Computer-based testing and digital learning platform among key offerings
After nearly 60 years administering paper-based testing for the CFA Program, CFA Institute will transition its Level I program to computer-based testing (CBT) starting in 2021. The transition helps CFA Institute keep pace with the evolution of global testing and credentialing practices and improve the overall candidate experience. CBT enables CFA Institute to offer a wider selection of test venues, more flexible scheduling, and expedited exam results delivery.
“Our highest priority is to uphold the standard of the CFA charter. Maintaining the security of the exam and the rigor of what is expected of candidates is critical to that process,” said Paul Smith, CFA, president and CEO of CFA Institute. “This is a natural evolution in how we design and deliver our programs. Offering computer-based testing is part of a larger digital transformation of the CFA Program that supports our mission to lead the investment management profession globally, increase our global relevance, and better reflect investment practice in today’s workplace.”
A one-stop digital learning platform, known to candidates as the Learning Ecosystem (LES), is now available for Level I candidates. The LES offers the entire Level I CFA Program curriculum, all existing study tools, and features that help candidates track and manage their learning through an online, personalized learning experience. The curriculum itself is evolving too, to include fintech topics such as artificial intelligence and machine learning.
On 22 February 2019, CFA Society in Switzerland held the swiss local final and the award ceremony of the CFA Institute Research Challenge in Switzerland. This was a special challenge since initiated by Florian Esterer, CFA, it is the tenth time, the CFA Institute Research Challenge is run in Switzerland, and we can be very satisfied that it has become an important and widely recognized element of the academic calendar over the autumn term.
This year, students from 7 different universities (Basel, Lausanne, Zürich, Neuchâtel, Lugano, St. Gallen and Liechtenstein) had to analyze Landis & Gyr, write a detailed research report and present their investment case in front of a jury consisting of senior investment professionals. University of Lausanne (taught by Prof. Dr. Norman Schürhoff) delivered the best presentation and the best research report and was thus local champion and will compete at the EMEA regionals on 10/11 April 2019. The jury also appreciated the team of University of Basel’s clear opinion and especially University of Zürich (Department of Banking & Finance) who delivered the best presentation that university’s team ever did.
We are thankful to our 7 judges, 28 mentors and 21 graders who supported their challenge through their dedication and work. We are also thankful to Credit Suisse (Experienced & Campus Recruitment Switzerland) for the sponsorship over the last 10 years as well as Finanz und Wirtschaft for their media partnership.
This year, the EMEA regional will take place in Zürich on 10/11 April 2019 (link: http://researchchallenge.cfainstitute.org/emea/)
The winning team of the 2019 CFA Institute Research Challenge Switzerland, John Cody Zimmermann, Henri Enguerran Badoux, Karine Chammas, Alexandre Axilais, Nicolas Bregnard (from left to right, © Carole Fleischmann), are students of Prof. Dr. Norman Schürhoff at the University of Lausanne.
Jury and volunteers:
Eugene Evgenii Skrynnyk, Peter Romanzina, CFA, Christoph Gretler, CFA, Olivier P.Müller, CFA, Christian Dreyer, CFA, Markus Matuszek, CFA, Pablo Amuchastegui, CFA, Peter Bänziger, Christian Wält (Head of Investor Relations of Landis & Gyr) and Florian Esterer, CFA (from left to right, © Carole Fleischmann)
Contribution from Olivier P.Müller, CFA
On 14 February 2019, the Swiss CFA Society invited Dr. Martin Liebi LL.M. of PwC to discuss upcoming Swiss regulatory changes under FinSA and FinIA. This event was sponsored by Principal and Saxo Bank and took place at the Saxo Bank Trading Lounge in Zürich.
What are FinSA and FinIA?
The Financial Services Act and the Financial Institutions Act are upcoming Swiss laws passed in 2018 by the Federal Parliament. These new laws may be thought of as the Swiss “children” of MiFID II, an EU regulatory framework implemented separately in each EU member state. The Swiss variants will each come into force on 1 January 2020, one year after MiFID II, but with a grace period for implementation.
There are two principal goals with FinSA and FinIA:
- Improved client protection; and,
- Swiss equivalence with EU regulation.
In addition, improved regulation of requirements for financial institutions, as well as financial products, services, and distribution are envisaged.
To whom do the laws apply?
Any firm providing execution, investment advice, portfolio management, or loaning cash against securities in any of the following financial instruments:
- Debt securities and bonds
- Shares in collective investment schemes / funds
- Structured products and structured investments
will fall under FinSA.
However, much about this definition remains unclear. For example: is a local bank that offers home equity loans included in this definition? There is no guidance in the law, so market standards are developing around these questions.
Swiss pension funds will become defined as “institutions” under FinIA, and will have more freedom to purchase unlisted investments. For the pension funds, this will represent a “regime change”.
How will the Swiss market change under these laws?
Many of the core requirements of these laws existed implicitly in the Swiss Code of Obligations but are now being made explicit in the new codes. The Swiss implementation of these principles is based on case law, in contrast with EU practice, which is generally based on statute law.
A principal feature of the new regime is the client advisor register. Any firm seeking to do business with Swiss-domiciled clients will need to be registered. For example, an asset manager in London looking to drum up business by cold-calling into Switzerland will need to first formally register herself.
Firms must record their interactions with clients and now they must also provide all of this internal information to clients on request. This includes recordings of phone calls to brokers, but likely applies only to business conducted after 1 January 2020.
Every financial services provider will also need to name an ombudsman. Banks can make use of their existing ombudsman, but other firms will require one for the first time.
In parallel with new EU rules, there will be more substantial prospectus requirements in Switzerland. The existing rules around prospectuses were crafted around “selling cows to each other”, with very limited disclosures, but under the new laws there will be many detailed requirements. In addition, each new prospectus will require independent review, and the sign-off will only be valid for a period of 12 months, after which time a new new review is mandated.
Firms will also have an affirmative requirement to demonstrate best execution, as regards both timing and quality of executed trades. They will need to perform suitability tests for client investments, but only at the portfolio level. And the new laws preserve their ability to receive retrocessions (kickbacks from investment fund providers) with disclosure, in contrast to the EU regime.
For more information on these changes in the Swiss market, please refer to Dr. Liebi’s slides and the video of his talk, which can both be found on the event page.
As in the previous year, a team from the University of Lausanne has won the Swiss competition of the CFA Institute Research Challenge in 2019. Thus, Lausanne’s Faculty of Business and Economics (HEC Lausanne) consolidates its position as a breeding ground for successful financial analysts.
The CFA Institute Research Challenge is an annual competition to honor the best presentation and case study of a listed company by a team of students. In 2019, the young analysts evaluated Landis+Gyr. Founded in 1896, the Swiss company is the world’s leading provider of integrated energy management solutions for the energy industry. The winning team recommends Landis+Gyr shares traded on the SIX Swiss Exchange under the symbol LAND to buy and sets a price expectation of CHF 84.50 (+ 36 %).
The winning team of the 2019 CFA Institute Research Challenge Switzerland, John Cody Zimmermann, Henri Enguerran Badoux, Karine Chammas, Alexandre Axilais, Nicolas Bregnard (from left to right, © Carole Fleischmann), are students of Prof. Dr. Norman Schürhoff at the University of Lausanne.
First European-wide survey of investment professionals since MiFID II implementation highlights the impact on the cost, quality and coverage of investment research.
CFA Institute has released the results of a new survey of nearly 500 European and Swiss portfolio managers, analysts, and other professionals that reveals the impact of MiFID II on the cost, quality and coverage of investment research.
In the year following the introduction of MiFID II, investment research providers have weathered a shakeout in the investment industry as investment managers seek to re-calibrate their research needs under the new regime. The new research from CFA Institute offers the first European-wide perspective on MiFID II from investment professionals working across both buy-side and sell-side of the investment industry, with respondents working predominantly in portfolio management, research and C-suite roles.
Among key findings, the survey shows that research budgets have been scaled back, with the largest firms making the biggest budget reductions; the average decrease in research budget according to respondents is 6.3 percent. The reduction in budget, however, increases with firm size: for firms managing more than Euro 250 billion of assets, the average budget reduction is 11 percent, whereas for firms managing less than Euro 1 billion of assets, the budget change is negligible.
Switzerland is the only country where research budgets have increased rather than decreased. The reason is probably that the MiFID rule does not apply in Switzerland, according to which research expenses are either attributed directly to the client or must be booked to the P&L.
On 30 January 2019, the Swiss CFA Society invited Keith Black, CFA, CAIA to describe the present state of alternative asset investing around the world. This was a joint event with the CAIA Association and took place in Zürich.
The CAIA Association has over 9,000 members across 90 countries, and offers a two-tier exam system, with CFA Charterholders who wish to qualify able to bypass the first-level exam. Pass rates for each of the two exams are around 60%. The society is based in Amherst, Massachusetts with offices in Geneva, London, Singapore, and Hong Kong.
How big a deal are alternatives?
Worldwide, around $98 trillion are invested in the traditional investment vehicles of stocks, bonds, and cash, while $14.7 trillion are now invested in the “alternative” space comprising hedge funds, real estate, infrastructure, commodities, and private equity. This puts alternatives as a whole in the same size class as the developed equity markets ex-US.
Alternative assets have historically been marketed as a way to reduce unpleasant volatility in a traditional investment portfolio. The CAIA maintains a tracking index called the Global Invested Alternative Assets Portfolio, which is comprised of around 1/3 hedge funds, 1/3 private equity & venture capital, and 1/3 real estate and other real assets. In the 10 years through September 2018, this index underperforms global equity markets (7.7% annualized return versus 8.6% for the MSCI World) but with far lower volatility (around 7% versus 16%) and a far lower max drawdown (around 22% versus 49%!). Replacing some of the allocation to equities in a 60/40 stock/bond portfolio with an allocation to the investments in this index would have slightly reduced return but more significantly reduced volatility over this trailing 10-year period.
Who’s buying alternative investments?
Alternative investments, especially real estate, private equity, and hedge funds, are increasingly popular with institutional investors. Only around one-fifth of institutions now have no allocation to alternatives. Institutions are today increasing their allocation to every asset class within alternatives, save for hedge funds, to which they have traditionally been most heavily allocated. They seem to be reducing their hedge fund exposures but re-deploying that capital into private equity and real estate.
Sovereign wealth funds have been increasing their exposures to alternatives more or less steadily since 2002, and these allocations now comprise nearly 30% of their portfolios. These increases have come on aggregate mainly at the expense of their cash and fixed income positions.
Endowment funds, with their infinite time horizons, try to maximize their exposure to illiquid inflation-hedging assets. The famously successful Yale University endowment, managed by David Swensen, for example allocates over 70% to alternative asset classes today.
Public pension funds have collectively scaled back their return assumptions in the last decade. The lower expected returns allow more room for investment in lower-return but much less volatile alternative assets.
What is happening within the alternative asset classes?
The hedge fund marketplace has changed quite a bit since the 2008 financial crisis. Total AUM in hedge funds is now around $3.2 trillion, more than double the number of 2008. The total number of hedge funds is holding steady at around 8000 funds, but there has been a steady decline in the once-lucrative fund of hedge funds market. This peaked at around 2500 funds before the crisis, and is now down to only around 1500 funds of funds. Big buyers of these products were individual investors, but they have been leaving this space and demand has fallen with their exits. At the same time, there has been big growth in liquid alternatives to hedge funds in the form of UCITS vehicles. That market is up to more than €450 million, a nearly nine-fold increase from the 2008 era.
Hedge funds are getting bigger, and the boutique feel of the industry is giving way to domination by a few big firms. Institutional investors are demanding top quality and scale that only the largest firms can provide. It is much harder to be a new rising-star manager today than it was in the last decade.
Private equity has also seen tremendous growth since the 2008 financial crisis. Total assets allocated to capital-call vehicles are now $5.8 trillion across PE/VC, private debt, real estate, infrastructure, and natural resources. However, more than one third of this ($2.0 trillion) is so-called “dry powder”: money pledged by limited partners (investors) but not yet drawn down by the general partner (investment fund). This number has more than doubled since 2012, suggesting that demand for investments in this space is outpacing the supply of new deals. Most of this dry powder, both by magnitude and recent growth, is in buyout funds.
Traditionally viewed as a sub-category within private equity, venture capital has also grown since the crisis, from $9 billion in aggregate deal value to $76 billion in 2018. The number of deals per quarter has also grown roughly threefold during this period. Most of the action in VC is still in North America, but this is now followed closely by Asia, which has nearly caught up in number of deals in this past decade and sometimes surpasses America in deal value. European deals remain fairly steady at around half the number of those in America, but only around one fifth by value; there is clearly room (if not appetite) for growth in venture capital in Europe.
Private debt has seen 17-fold growth in the past 18 years, and today the total AUM in this space is close to $800 billion. Three areas make up the bulk of the assets in this sector: direct lending, distressed debt, and mezzanine funds. North America dominates in private debt ($88 billion in targeted fund size), with Europe at about half of that size, and Asia appreciably smaller, at $11 billion.
Of a similar size are the new closed-end private real estate funds, with around $900 billion in AUM. These funds can offer a positive yield spread over long-term bonds of up to several hundred basis points, and can replace some of the bond allocation in an institutional portfolio.
Infrastructure, Commodities, and Structured Products
Unlisted infrastructure funds have grown to nearly $500 billion in AUM. Today more than 50 open-ended funds exist in this space, giving investors access to returns from energy, renewables, transport, utilities, and telco.
Investments in natural resources, including commodities, tend to perform well when central banks tighten monetary policy. The last decade has been difficult for commodity investors, as commodity prices have declined at the same time as equity markets have risen sharply. But there is a potential demand for commodities as investors rebalance away from equity. Commodity prices became highly correlated with the equity markets for several years following the 2008 financial crisis, but have since reverted to much lower levels of correlation, between 0.2 and 0.4.
Finally, structured products have been making a slow-motion comeback since the 2008 crisis. Commercial mortgage backed securities (CMBS), for example, are being issued again at a pace of up to $100 billion per year in recent years, still far off their high of $230 billion in 2007. But CLOs (collateralized loan obligations) are now being offered at a rate of $125 billion per year, up by around 35% from their previous high-water mark in 2007.
The CFA Institute Research Foundation and CAIA published a new book in 2017, Alternative Investments: A Primer for Investment Professionals. This book gives asset managers a useful overview of the wide variety of alternative asset classes and investment vehicles.
by Leonor Vereda Ortiz, CFA
The 2019 Careers Event took place on 8 January in Zurich and 10 January in Geneva. In Zurich we had three corporate presentations by lead employers of CFA Charterholders in Switzerland as well as from an experienced recruiter in the field. The launch of the Careers Centre, CV review, and professional photos during an animated apéro completed the event.
Hosted by Credit Suisse, the event in Zurich started off with a general presentation about the current jobs market by Stephan Surber, Senior Partner at Page Executive. Their Job Index has been tracking the job market in Switzerland for the past five years. In 2018, the financial services sector was ranked number 11 in jobs creation (+4.6% more jobs). The speaker highlighted the opportunities for mobile applicants. Besides Zurich and Geneva, more financial services jobs are now located in Basel, Lausanne, Zug, or Canton Schwyz. There is also large demand for European talent abroad (e.g. London, Asia, among others). Hedge funds are not anymore in vogue, instead there is huge demand for private equity professionals. Compared to 15 years ago, the private banking jobs in Switzerland have become more professionalised and complete and demand a “well-rounded” banker. This results in higher demand for CFA Charterholders in roles such as sales — not only analysts or portfolio managers. He also touched upon the hot topic of gender diversity, which drives especially larger employers to search specifically for female candidates to provide diversity in some teams. Social media has become extremely important, because recruiters actively search for interesting profiles in LinkedIn. Therefore, your profile should be spot on, up-to-date, complete and informative! However, beware of offering an unprofessional presentation of yourself (Facebook, Instagram, etc.) as it can hurt your chances.
A panel composed of representatives from Swisslife (Reto Hadschin), Credit Suisse (Franziska Reiss), Page Executive (Stefan Surber), and Deloitte (Matthew Lock) discussed the topic of Recruiting Talent in the Digital Age. None of these employers use artificial intelligence to select candidates. However, some use technology to avoid unintentional bias in human recruiters when screening CVs, or to place job ads in appropriate social media. Artificial intelligence is more useful in sectors that need to recruit large numbers of similar candidates, as opposed to CFA roles that expect high specialisation or individual capabilitites, or to very senior positions. The use of the traditional CV in paper or pdf form will remain in spite of the new technologies. This seems to be because LinkedIn profiles are not always up-to-date. Motivation letters are fundamental and very useful for recruiters, but they should be be sharp, precise and tailored to the job posted.
Single presentations by Credit Suisse, Deloitte, and Swisslife followed. Highly specialised CFA Charterholders are normally in high demand, while programming knowledge was not considered an asset in conjunction with the CFA designation.
A member of the Careers Committee of CFA Switzerland presented the newly launched Career Centre. This website is open for companies in Switzerland to post job ads that require the CFA designation. It is also open for Members of the Society to upload their CVs and be found by employers and recruiters. The Careers Centre is supported by CFA Institute and exists already at a global level, so it links to global job offers too. UBS, Credit Suisse, Page Executive, Lombard Odier, and Evooq are supporting the Swiss Career Centre as Launch Partners. Check out their job offers!
The Careers Centre aims at providing a focused search location for CFA jobs in Switzerland. A special promotion for employers is available until 30 June 2019. You can contribute to this effort by alerting the HR department of your firm about this opportunity (email@example.com ).
The event continued with a lively apéro. Members could have their CV picture taken by a professional photographer and their CV checked by one of eight “CV doctors”. Most of the close to 70 Members who attended benefitted from these extraordinary offers. We wish them good luck and success for their next career move!
Keep checking for further offers and events from the Careers Committee.
The CFA Institute European Investment Conference was held in Paris, France, over two days. The interactive conference provided a unique opportunity for Europe’s leading investment professionals to interact and debate current issues impacting the financial markets. On Monday, the conference started with welcome remarks by Mr. Jean-Philippe Dorp, president of the CFA Society France. The CFA Society France was the official host this year.
The first session was led by Mr. John Hulsman concerning how to predict political risks and make accurate forecasts accordingly. Mr. Hulsman’s key remarks included hiring someone who understands the political environment to avoid falling victim to the unexpected and is not afraid to admit to making a mistake. After each session, the audience was encouraged to send their questions via the conference app. Each member was able to see each other’s questions and vote by giving a question a “like”. During the first Q&A session, questions flooded Mr. Hulsman relating to the political impact surrounding Brexit. Mr. Hulsman did not hesitate to label the event as “catastrophic”. He added that Brexit will be more damaging for the United Kingdom than the European Union (EU).
Another interesting session was held with asset owners (i.e., Chief Investment Officers of CERN Pension Fund and Hassana Investment Company as well as the Head of Investment at Aalto University Endowment). During this session, the asset owners provided their perspective on what they look for when hiring asset managers. Some key remarks included building a productive relationship by improving communication, listening carefully to what the asset owners’ need, disclosing fees schedules upfront and following the selected investment strategy.
In between sessions, coffee breaks were offered which provided an opportunity for networking among industry peers. The afternoon followed with interactive workshop streams. I joined Dr. Mariano Sigman’s workshop. Dr. Sigman is a neuroscientist and the famous author of more than 150 publications in scientific journals as well as the bestseller The Secret Life of the Mind. During this workshop, Dr. Sigman started his session with a simple question “how many goals were scored during the 2018 World Cup?” and instructed the audience to gather in groups of four. The rules were simple. Each group needed to arrive at a unanimous answer. In my group, the guesses ranged from 80 to 300 goals. A self-declared leader of the group decided that the group answer should be 160 goals because it was approximately the middle, and no one disagreed. To my surprise, Dr. Sigman predicted what he thought happened in the small groups with an astonishing accuracy. The answer was 169 goals. To make decisions intelligently, he suggested to take a group and break it into small groups and keep them independent from each other. Each conference participant had the opportunity to obtain a signed copy of Dr. Sigman’s book after his workshop.
Professor Mazzucato is the author of The Value of Everything and The Entrepreneurial State: Debunking Public vs. Private Sector Myths. Her session focused on one simple question “what constitutes value?”. This session sparked a challenging debate afterward. Among others, she debated that the EU value and role in the UK was not being perceived in its entirely; therefore, after Brexit many issues will surface including human rights in the UK.
The evening reception was held at the Musee des Arts Forains which was another networking opportunity.
Day two of the conference followed with a similar schedule including several sessions targeting topics such as the impact of considering products that include ESG criteria, artificial intelligence and data analytics in the trading world. Several Q&As received similar questions related to the battle between artificial intelligence (AI) vs. human intelligence, regulation for the Fintech industry and implementation of accountability to measure the ESG criteria. Finally, other relevant discussions were how to manage stress, whistleblowing in Europe, ethics and how executives should adapt to disruption.
Overall, the conference served as a platform for asset managers to become more familiar with the challenges facing the investment industry and the European market. What caught my attention the most was the repeated concern of investment professionals with being replaced by AI soon. I personally do not believe that human intelligence will stop being in demand in the long-term. There will always be a need for “health checks” of work products produced by AI.
Next year’s conference will take place in Madrid, Spain. Make sure to get an early bird ticket!
CFA Institute sees 13% candidate growth globally, greatest in Asia Pacific region; +2% in Switzerland
NEW YORK CITY, 23 JANUARY 2019 – CFA Institute, the global association of investment management professionals, reports that 45 percent of the 77,245 candidates who took the December 2018 Chartered Financial Analyst® (CFA®) Level I exam have passed. These successful candidates now progress to Level II of the CFA Program, the second of three exams toward earning the CFA charter, one of the most respected and recognized investment management credentials in the world. The December 2018 exam saw continued growth of more than 13 percent over 2017 in the number of Level I candidates who tested for the CFA Program. In Switzerland, where CFA market penetration is already very high (4th rank worldwide and 1st in Europe), 445 candidates took the Level I exams, nine more than in the previous year (+2%).
Communiqué de presse (French)
With the launch of the European Commission’s Action Plan on Sustainable Finance, CFA Institute had asked its EU members last year to what extent ESG factors should be mandated in the investment process. While EU investment professionals increasingly consider ESG factors, they oppose a European Commission mandate.
On 4 January 2019, the European Commission nonetheless published draft regulation on ESG integration. Time to look closer at the results of the CFA Institute survey: The Evolving Future of ESG Integration in Investment Analysis.
The survey gauges the attitude of investment professionals across the EU on what duties such managers should have to integrate Environment, Social and Governance (ESG) factors in their investment decision making process. The survey provides insight into how EU-based investment professionals view such ESG “factoring” generally and whether ESG considerations should be mandated by the regulator.
The Swiss Pensions Conference, organized annually by CFA Society Switzerland, will highlight the topic of sustainable investments for decision-makers in the Swiss pension system.
7 May 2019 in Geneva
27 June 2019 in Rüschlikon near Zurich
In its new study, Switzerland – A strong hub for investment management, the Swiss Bankers Association uses CFA charterholder market penetration in core functions of investment management as a key indicator of the Swiss financial centre’s professionalism and maturity.
The CFA charterholder market penetration in core functions of investment management illustrates the level of know-how available in the financial industry. Switzerland is the fourth largest market in terms of CFA charterholder penetration globally after Canada, Hong Kong and the US, making it the leader in Europe.
The study by SwissBanking and the Boston Consulting Group establishes that the Swiss investment management hub is unique, and a key export industry of the Swiss financial centre, with a total of CHF 3.4 trillion AUM mandates in Switzerland in 2017, with approximately one-third made up of foreign clients.
New research from CFA Institute explains the evolving landscape and makes recommendations for improving investor access to private markets
Increasingly, well-funded private institutional investors are leading a shift in capital formation away from public markets. Firms are staying private for longer and raise more capital privately than in the past. To illustrate these trends, it is estimated that the median time to IPO for US companies has risen from 3.1 years in 1996 to 7.7 years in 2016. While firms are still privately held, they are also able to raise more capital: a median of US$12.2 million was raised prior to IPO in 1996, compared to a median of US$97.9 million raised prior to IPO in 2016. Whilst these trends are most pronounced in the United States, other developed markets, including the UK and the euro area, show similar shifts.
With firms pursuing IPOs at a later stage in their development (or simply exiting the private markets via a trade sale to a large public company), individual investors are seeing fewer IPO opportunities and could miss out on the returns provided by rapidly growing new businesses whilst they are kept in private hands. And, what does eventually become public often has much of the value already extracted.
The paper makes the following policy recommendations to ensure fuller market transparency and to level the playing field for individual investors where possible:
- Better disclosure and transparency standards in the private markets
- Stringent investor protections should remain in place for listed markets
- Access to private market investments by pension savers should be enabled through professional intermediaries
In October 2018, CFA Switzerland Institute invited Mr.Christophe-Pierre Lobisommer to present different risk models to construct cross-asset portfolios.
Mr Lobisommer has focused on the practice of risk-based portfolio management, as this investment style has gained in importance for three main reasons:
- Defining the risk of the portfolio by the equity parts is not enough anymore, as we saw it during the financial crisis,
- The need for more diversification,
- The need to find other sources of Alpha or Risk Premium in the context of the low interest rate environment.
In the first part of the presentation, the focus was on the concept and the implementation of cross-asset portfolio construction and the comparison of relative return and absolute return. The second part has dived deeply into the portfolio construction, allocation and management mechanisms.
The speaker started by describing the investment process, which is divided into four steps:
- Clients’ needs: Establish the risk profile of the clients, which are divided into two groups:
- Non-qualified Investors (private clients with retail solutions and private clients pension plan),
- Qualified Investors (private clients with Asset Management mandates, Cooperation Partners, Institutional Investors, 3rd party Banks / Insurance).
- Allocation: Put a weight to asset classes based on clients’ needs,
- Implementation: Choose the right instrument (equity, bonds, etc.),
Then, Mr Lobisommer has highlighted the distinction of relative return and absolute return. In relative returns, there is a strategic asset allocation with a target of outperforming the benchmark (generate Alpha). In the context of absolute returns, there is no benchmark and the primary objective is to generate a positive return which is in line with the Risk Budget.The starting point of the portfolio construction is the definition of an investment tree (trunk=portfolio basis), with branches (asset classes), that are themselves divided into smaller branches (sub-classes), etc.For risk-based portfolios, the core allocation will be dynamic, with a high level of turnover and depending of the risk landscape of the different risk classes, considering client restrictions (ESG, regulation, instruments, taxes).
Next, the speaker looked at the mathematical part of portfolio construction, the risk model, which is defined by three sets of parameters: expected returns, volatilities and correlations.
In order to compute the parameters, the investment managers can use the following techniques for instance (not exhaustive list):
- Black-Litterman model, developed at Goldman Sachs in 1990, is a way for developing a set of expected returns based on the mean-variance optimization framework. The model can overcome issues such as the sensitivity of the expected return,
- Robust estimators are statistics with good performance for data drawn from a wide range of probability distributions,
- The shrinkage approach shows how a prior belief modifies the sample estimate of the mean and variance toward the estimate restricted by the asset-pricing model1,
- The Exponentially Weighted Moving Average (EWMA) technique was derived by JP Morgan in 1989. The EWMA method of calculating volatility laid more emphasis on more recent returns. The reason behind is that recent price movement is the best predictor of future movement2,
- The Spearman’s Rank Correlation Coefficient is the non-parametric statistical measure used to study the strength of association between the two ranked variables,
- Tail correlation will focus on the extreme event periods.
The forecast capability defines the level of ability to forecast the parameters. In the case of an investor without knowledge of the parameters, the equal weight approach is most suitable. At the opposite, if an investor is able to compute the expected returns, volatilities and the correlations, then the mean-variance approach will be preferable, for instance. In the context of risk model, the expected returns are ignored by definition. Investors might want to opt for this risk-based approach as it is difficult to estimate expected returns.
- Markowitz’s approach is based on the expected returns, the standard deviations and the correlations of different assets,
- Minimum variance: The portfolio is constructed using only on measures of risk, variances and correlations, instead of using both the returns and the risks,
- Zero or Perfect correlation,
- An inverse volatility construction weights the asset inversely to their volatility, but ignoring their correlations,
- High conviction portfolio,
- Equal weight.
(not exhaustive list)
The client’s goal depends on the dialog with the client and what are his objectives, and this will define the mathematical function to be used, for instance:
- Max. Sharpe Ratio,
- Equal contribution to risk,
- Maximum diversification,
- CVaR (or tail risk) approach,
- Or others.
A risk-based approach will focus more on the weighting of risk, while a relative-return approach will mainly focus on capital allocation.
In order to define tactical views that can be used for a risk-based solution, one can look at markets’ performance, macro/politics, quants models or screening of sectors and regions. Based on the inputs, a view (generally relative) can be generated and then defined with a level of confidence (low, medium and high) which will be translated mathematically.
Christophe-Pierre Lobisommer has then focused on a specific example: the mechanism of risk-based portfolio management. The idea of a risk-based investment says that the core of the portfolio, an equivalent to a “SAA”, is variable as the market risk conditions are evolving over time. The objective is to have a constant risk that will derive a dynamic capital allocation.
The discussion pursued on the behavioral aspects in risk-based portfolio management. The portfolio is usually quite stable over months (i.e. without abrupt changes), but it is dynamic since the allocation is changing. The risk-based approach seems to reduce drawdowns in periods of crisis, even if the performance on the long term should be the same as the classical approach. In very bullish market, the risk-based approach may miss some good opportunities against the constant mixes.
To conclude, since the 2008 financial crisis, risk-based solutions gains in recognition. These solutions might lead to lower “big losses” and avoid some cognitive mistakes of the classical approach. This approach requires an active and daily management as well as a high knowledge in risk management.
Christophe-Pierre Lobisommer has been working at Zürcher Kantonalbank since 2015. Previously he gathered 12 years of experience in risk management as well as research at UBS Wealth Management and in structured products at Vontobel Investment Banking. He is a guest speaker in master classes at Zürcher Hochschule für Angewandte Wissenschaft (ZHAW) and Hochschule Luzern. He holds a Master of Science in financial engineering from the Grenoble INP and a Master of Advanced Studies in quantitative finance from EPFL. In 2012 he completed his education with a Diploma of Advanced Studies in Banking from the University of Bern-Rochester.
Other articles written by Mr. Christophe-Pierre Lobisommer:
Note 1: A shrinkage approach to Model Uncertainty and Asset Allocation, Zhenyu Wang, 2003
Note 2: Modelling Stock Prices with Exponential Weighted Moving Average (EWMA), Adejumo Wahab Adewuyi, Journal of Mathematical Finance, Vol.06 No.01(2016), Article ID:63814,6 pages
Contribution from Dr. Zuxiang DAI, Head of Risk & PnL Reporting at Leonteq Securities AG
On 17th November 2018, the Chinese Association of Finance Professionals in Switzerland (CAFPS), in association with the Association of Chinese Students and Scholars in Zurich (ACCSZ), organized a seminar on “careers and education in finance”, in response to the requests for information from Chinese students at Zürich University. This seminar comprised three sessions covering: industry qualifications, job searching skills and Chinese professionals’ career opportunities and challenges in Switzerland.
The president of CAFPS, Mr. Zuxiang DAI, delivered the opening speech by introducing the keynote speakers and warmly welcoming all the attendees. He highlighted the objectives of CAFPS and expressed his hope that this seminar could address important questions and concerns of attendees.
The first guest speaker, Mr. Philippe Mondoloni, introduced his career mentor project. This encompassed aspects such as setting a reasonable goal after analyzing your strengths and weaknesses, dos and don’ts in the CV, job searching and interview skills. On the topic of how to find jobs effectively in Switzerland Mr. Mondoloni said there is a hidden market right there. Finding ways, e.g. social media, to directly contact the hiring manager would be an effective shortcut. In terms of CV preparation, he stated that special attention needs to be paid to keywords because they are usually used by big companies to filter CVs. Lastly, he offered free workshops to those who would be interested in having tailor-made training.
Session two was about a brief overview of the golden standard in finance education, i.e. CFA, presented by the CEO of CFA Switzerland Mr. Christian Dreyer, CFA. He stated that a CFA qualification should be “a must” for the investment management industry in Switzerland. Currently 60% of the total 160,000 members worldwide are from the Americas, 22% from EMEA and 19% from Asia Pacific. Nevertheless, a rapid growth of members in the Asia Pacific region in recent years makes this region strategically important for the CFA Institute. Furthermore, Mr Dreyer, compared three different financial qualifications (CFA, CIPM and the Investment Foundation Program) and argued that CFA is the highest qualification among them. Especially because the passing rate of 20% (on the three levels of exams, globally) and importance placed on ethics. He also described the favorable career prospects for CFA Charterholders.
The last speaker was Ms. Bing Xie, Managing Director of ChinaSpeaks AG. She talked about career challenges and opportunities for Chinese speakers in Switzerland. As a Chinese living and working in Switzerland, she firstly introduced her own experience. She emphasized the importance of knowing ‘where we are’, which includes to know the country, the job market, the culture and the language. In terms of job opportunities, she recommended the industries and sectors in which China and Switzerland have business connections. According to her, having a proactive approach, using a Swiss-German style CV and drafting a short summary at the beginning of CV could largely contribute to the success in job searching in Switzerland. Leveraging on a number of years of HR experience and a good understanding of local market, she incorporated a recruiting company focusing on hiring Chinese-speaking professionals in Switzerland. She also expressed she would be delighted to provide job-searching support to anyone in need.
After the insightful presentations given by the keynote speakers, as well as the Q&A session, CAFPS president Mr. Dai expressed his gratitude to the speakers and the supporting team working behind the scenes. The event was followed by a networking apéritive. The feedback about this event was very positive and some attendees even suggested to organize more events on the same topic.CAFPS (2)-min
Originally published in The Charter # 17 in February 2017. By Jean Philippe Tripet, CFA and Dersim Avdar, CFA
In the last 20 years, numerous initiatives have been launched to promote young and innovative companies in Switzerland. And still, no one has heard of a Swiss Uber or Spotify. The following lines explain why current efforts are insufficient and what should be done to improve this situation. Let us start with some examples from recent events. HouseTrip was founded in 2009 in Lausanne but moved to London to support the expansion of its holiday apartment marketplace, before being finally acquired by TripAdvisor. Telormedix, an immuno-oncology company from Lugano, saw its assets sold to a foreign firm after failing to raise enough capital to finance the next stage of its clinical trials.
AC Immune, which was born in Lausanne and focuses on neurodegenerative diseases, launched its IPO on NASDAQ to fuel its next growth phase. The common feature of these young Swiss companies is that they all had ambitious international growth plans but couldn’t find the necessary growth capital at home. Occurrences of such firms that want to grow internationally and manage to raise multimillion amounts in Switzerland are the exception rather than the norm.
Help in the early stages is easy to get…
Statistics show that finding the first million to launch a company is quite doable. This has been the case for quite a long time and the number of companies financed increases year after year. Many organizations open their doors to people with innovative ideas and help them transition to entrepreneurship: support provided by specialized teams at ETHZ, EPFL and various universities, canton-wide programs including Technoparks, federal programs like CTI, the SIX accelerator, privately supported institutions like Venture Kick or Kickstart Accelerator and numerous business angels help founders find the support and capital needed to incorporate and develop their business idea at the start. The number of financing rounds observed the last 5 years shows a clear concentration around the CHF 1-2 m region1. Hence, the initiatives launched in the last years do help at the very early stage.
…until you reach the valley of the death
It all becomes much more difficult once companies reach later stages and want to expand outside Switzerland. From that moment, the ability to rely on subsidized facilities decreases, and organizational costs linked to the necessary growth plans force entrepreneurs to invest in their own infrastructure, which can place considerable pressure on finances. The combination of rising capital requirements and absence of or still low revenue in the Venture Capital (VC) and then Growth phases leads to the valley of death phenomenon we observe between CHF 3 m and 10 m. The Swiss valley of death is much longer and deeper than in peer countries like Israel or Sweden. The situation has even worsened in 2016, with 11% less rounds recorded in later stages, compared to 2015. Here we find the key weakness of the above-mentioned Swiss initiatives: they push for the creation of start-ups but do not lead them to a better access to capital markets in later stages.
Several factors can explain this:
1) With an average fund size resting around CHF 60m (own market survey), the top 10 Swiss VC have insufficient reserves for later rounds and therefore difficulty to attract foreign larger-pocket Growth investors.
2) Perversely this makes the funds also less attractive for institutional investors who typically do not want to own over 10% of a fund and find an investment amount in the few millions too small to even be considered.
3) These same institutional investors are more interested in allocating large sums to a smaller number of more predictable brick-and-mortar companies than in late stage VC or Growth firms.
4) Venture and Growth Capital are local businesses. Having a local-led investor syndicate helps a company a long way to make contacts and secure financing internationally. Firms without local investor help encounter difficulties and longer times in accessing capital markets and in particular debt.
This restrains companies in their expansion plans and forces them to rely on organic growth only. Many firms with great potential thus either remain small for a long time or run out of liquidity because of overly optimistic revenue projections. So far some few firms manage to find the necessary capital in foreign countries. They tell us that the effort to close a foreign-led round is often up to 12 months long and Swiss civil law can be confusing for people used to common law.
New initiatives should improve the situation
Recent developments brighten this situation for the near future. For the first time outside Life Sciences, corporates have publicly shown strong commitment by working together with founders to check if their business idea passes the proof of concept. EY, Credit Suisse, Raiffeisen, UBS, PwC, Swisscom, Coop and Migros among others offered coaching to participants in the Kickstart Accelerator program and some of them announced that they will work with the winners in the months to come. Such a platform is attractive to foreign VC funds and should help them invest in a market that they previously more or less ignored.
The political stage is also active: with Mr. Konrad Graber’s motion being quickly accepted for review by both Chambers and our government, momentum is becoming stronger. The motion aims to facilitate pension funds’ investments in young and innovative Swiss companies. Several meetings have taken place between the Federal Council and interest groups such as the pension funds association, bankers association, insurance association, Private Equity (PE) association and fund managers to discuss a solution to the motion. Bundesrat Schneider Ammann used a lot of his presidential leverage to bring the topic to the media’s attention with very good follow-up.
Different projects have been presented during these meetings, including international PE portfolios with a high allocation to Switzerland, international funds of funds and Swiss only PE solutions. The project that focuses most on Switzerland is the swiss-fund. The idea of swissfund is to offer larger pension funds with international PE exposure a product to diversify in Switzerland, where they usually have poor exposure. With a target fund size of CHF 300m, swiss-fund’s goal is to invest 80% of its capital in Swiss companies across several stages of their lifecycle, including Buyout, Growth and VC. Combining this diversification by stage with a generalist, sector-agnostic approach, allows to offer a product that ideally complements a global private equity portfolio. Investors’ interest is there and we believe we should see lead investors emerging in early 2017. In addition to the fund’s primary goal to deliver solid returns to its investors, swissfund will also do good for Swiss entrepreneurs.
This is the Swiss recipe for success: a private initiative with private funding that builds bridges between founders and the academic, political, corporate and financial worlds to reach one overarching goal: enable the next generation of firms to display Switzerland’s pioneering innovations to the rest of the world. No tax payers’ money needed.
Note 1: Many innovative SMEs fly under the radar of statistical surveys because they do not participate in business competitions or publish press releases, so the real number of rounds and companies seeking capital is probably significantly higher than the one displayed here.
AC Immune. (2016, September). AC Immune | Press releases. Retrieved November 22, 2016, from www.acimmune.com/en/news-releases
Aravis. (2016, November). Telormedix –Aravis. Retrieved November 22, 2016, from www.aravis.ch/portfolio/fund/telormedix
Bloch, G. (2016, April 28). TripAdvisor s’empare du «Lausannois» HouseTrip. Retrieved November 22, 2016, from https://www.letemps.ch/economie/2016/04/28/tripadvisor-s-empare-lausannois-housetrip
startupticker. (2017). Swiss Venture Capital Report 2017. Luzern: startupticker.ch
Tiago, P. (2016, November). Swisscom, UBS et Migros testeront les solutions des start-up du Kick- start Accelerator. Retrieved November 10, 2016, from www.ictjournal.ch/news/2016-11-07/swisscom-ubs-et- migros-testeront-les-solutions-des-start-up-du-kickstart
Tripet, J.-P. (2016, February). Risikokapital: Unausgeschöpftes Potenzial. Schweizer Personalvorsorge, 2(2), 10–12.
STARTups of David, CFA Institute Magazine September 2016, on why has Israel become a key market for early-stage innovation.
Jean-Philippe Tripet CFA is Managing Partner and founder of Aravis, a leading Swiss private equity and venture house. Jean-Philippe was particularly active in seeding and founding some of the most successful Swiss biotech companies such as Glycart, Cytos, Modex-Isotis, Esbatech, Evolva, Symetis, Telormedix and Novimmune. Prior to founding Aravis, he was a senior executive VP and head of sector asset management and research at Lombard Odier & Cie, Geneva, and member of the Group Executive Committee of the bank. Previously he was VP Equity Research at UBS in Zurich and London. Jean-Philippe has a degree in business ad- ministration from the University of Geneva with graduate studies in finance in St. Diego, California. He is CFA charterholder since 1993.
Dersim Avdar is Analyst at Aravis. Prior to joining the firm, he gathered experience at UBS Investment Bank in Zurich and Banque Pictet in Geneva, where he supported the private equity investment team in the due diligence of several buyout funds. He is a Venture Kick jury member. He studied Banking and Finance at the University of St. Gallen, with semesters in Madrid and Beijing, and is currently studying to become a CFA Charterholder.
Note 1: Many innovative SMEs fly under the radar of statistical surveys because they do not participate in business competitions or publish press releases, so the real number of rounds and companies seeking capital is probably significantly higher than the one displayed here.
CFA Society members had the opportunity to see a very interesting presentation from Dr. Lidia Bolla CFA, CEO and CoFounder of Vision&, a Swiss-based, SRO-regulated asset manager facilitating the access to innovative Blockchain investment opportunities.
The discussion began by defining Blockchain as a technology that ensure consensus finding, in a decentralized system that reduces uncertainty. Blockchain helps to enter in transactions safely with people that we do not know or trust, only through technology, without the intervention of third party such as banks or governments.
We learned that there are four different categories in Blockchain universe:
- Currencies: Coins belonging to this category aim at developing a better currency system (e.g. Bitcoin)
- Developer tools: Enable developers to create new applications on top of the Blockchain (e.g. Ethereum)
- Financial applications: Projects aiming to facilitate financial transactions and investments (e.g. clearing settlement process)
- Non-Financial applications aggregate all non-financial Blockchain projects
The presentation then introduced the advantages of Blockchain which are trust, security and efficiency. Dr. Lidia Bolla made her point through different great examples, such as when buying a used car, we have to trust the buyer, on the kilometrage or the number of accidents. Through Blockchain, each time this car is brought for a service, information on the car is registered on Blockchain and shows all the needed data the buyer requires to buy the car in the future, with certainty the chain of information was not altered. Dr. Lidia Bolla conclude by mentioning the Blockhain fundraising through ICOs (Initial Coin Offerings) which have reached USD 9.5bn in 2017 and USD 12bn Ytd 2018 compared to USD 1.3bn in 2016.
The last part of the presentation was dedicated to possibility of investment in Blockchain assets. The Crypto Market is still relatively young and small with USD 594bn market cap as of end 2017, compare to a world stock market of USD 52 trillion. To get access to Blockchain technology, Crypto Assets is the easiest way compared to Listed Equity and Venture Capital. Crypto Assets can be split into three categories:
- Pure Currencies like bitcoin which have an intrinsic value of zero as a US bill or a Picasso’s painting. The value depends on how people value the goods in the future
- Utility tokens are issued in order to fund development of cryptocurrencies and can be later used to purchase a product or a service given by the issuer; it can be seen as a Digital voucher
- Security tokens derive their value from an external and tradable asset
Dr Lidia Bolla has higlighted the volatility of Bitcoin close to 100-120% in 2014 that went down bet to a low point of ~60% in beginning 2017 before going back to 100% end of 2017, as lots of retail investors enter into the Bitcoin. As institutional investors enter into this space, the volatility should go down over time. Indeed, American banks and players like WeAre are helping institutional investors to enter the market. On top of this, Crypto Assets are a means of diversification, as they have almost no correlation with Traditional Assets.
A video recording of the session is available on the members only past events page!
Dr Lidia Bolla CFA, has a vast experience in quantitative finance, asset management and complex tech projects. Before cofounding a startup in the field of machine learning applications, Lidia was Managing Partner of a Swiss advisory boutique specialized in quantitative finance. Earlier in her career she worked for major investment firms (J.P. Morgan, Swiss Re, Man Investments) in various asset management roles in Zurich, London and Hong Kong. Lidia holds a PhD from the University of St. Gallen, specializing in investment strategies and asset management, and acts as advisor to blockchain startups in that field.
What in the world is going on? – This was the subject of a compelling discussion at the Baur Au Lac on Thursday, 25 October. The evening started with a short reception which served as a warm up for the following 2 hours of speaker presentations and Q&A session. The panel of experts were Brigadier General TIM Waugh CBE, former Chief of Staff at NATO; Professor David Basin, ETH cybersecurity expert and Dr. Klaus W. Wellershoff, former chief economist at the Swiss Bank Corporation and Chairman of the Board at Wellershoff & Partners. The panel of experts was moderated by Stephan Klapproth, former Anchorman of Swiss National Television’s Ten O’ Clock News program. The latter made the audience burst into laughter more than a couple times with his captivating sense of humor (e.g., “God knows he is not Donald Trump”). The event was open to members and non-members of the CFA Switzerland society. During introductions, the CFA Switzerland’s board members were recognized with a standing ovation for their service and dedication to excellence.
The speaker presentations started with Brigadier General TIM. NATO is an organization established by member states which number 29 today. NATO represents a political and military alliance for its members. NATO’s initial response to an immediate threat will include deployment of 20,000 troops provided by the member states. The United States leads the pack as a main funds contributor. From Brigadier General’s perspective, it came to no surprise that today’s challenges are being led by Russia’s increase in army, navy and military activity. Russia’s military activities have been headlines for quite some time now. Other emerging concerns mentioned were counter terrorism, migration, weapons of mass destruction, cyber defense as well as data and artificial intelligence.
Cyber defense, being a major concern in the modern day, was the topic tackled by the next speaker. Professor David Basin discussed IT risks in modern society and privacy concerns (e.g., Facebook and Cambridge Analytica). Not that long ago, the world came to a hard awakening when it was reported that Cambridge Analytical harvested data of 86 million Facebook users. It not only collected data on users but also on their friends. The risks of these practices involve loss of privacy, democracy and sovereignty. From an investor perspective, this expert encouraged the research of security and privacy risks in companies including adequate measurement and weight.
Finally, the speaker presentations ended with Dr. Klaus W. Wellershoff who earned the title of “evening’s pessimist” by the host and members of the audience. Dr. Klaus presented unexpected theories to what he believes influences the investment market. He added that it was “foolish to think that the media and politics matters” at all. According to his theory, politics only matters when it comes to war. To him, technology matters even less than we believe. His technology remarks in some way contradicted Professor David’s. He earned his title after illustrating how a naïve investment approach leads to better results than a managed investment fund. As such, he recommended to use the naïve approach for investments and asset class allocation.
The Q&A followed with questions from the audience and intense debate from the three speakers. The evening concluded with small reception. As I walked around the room, I could hear small groups debating whether their jobs as investment professionals had more meaning than the one being portrayed by Dr. Klaus. Whether the investment market is significantly influenced by war, technology, politics or interest rates, I do not think the theory was fully proven this evening. I am inclined to believe that all of the above are precisely the factors that influence the investment market today.
Check out the evening’s pictures !
CFA Institute and FINRA Foundation Study Debunks Common Myths about Millennials and Investing
New research finds millennials lack confidence making investment decisions, cite lack of investment knowledge as barrier to investing, and show limited interest in robo-advisors
Conventional wisdom paints a picture of millennials as aggressive, knowledgeable, and confident when it comes to investing, buta new research study sponsored by CFA Institute and the FINRA Investor Education Foundation debunks common assumptions about millennial investors. The research, titled “Uncertain Futures: 7 Myths About Millennials and Investing,” explores the attitudes and behaviors of millennials when it comes to finances and investing.
An overview of the presentation Dr. Andrew Lo gave in Zurich on the Adaptive Market Hypothesis
Andrew Lo is a finance professor at the Massachusetts Institute of Technology (MIT) and is well-known for creating the Adaptive Market Hypothesis (AMH). Dr. Lo is also a practitioner as he established the investment management firm AlphaSimplex Group in 1999 of which he is still the Chairman and Chief Investment Strategist.
The foundation of the AMH is the Efficient Market Hypothesis (EMH) developed in the 1960s by Eugene Fama from the University of Chicago. Dr. Lo does not believe that the EMH is incorrect; however he argues that it is incomplete as financial markets are not always efficient and investors do not always behave rationally. The AMH uses several disciplines, such as evolutionary theory and psychology, to explain the shortcomings of the EMH.
In the presentation to the CFA Society Switzerland in Zurich, Dr. Lo discussed some of the findings of his latest book Adaptive Markets: Financial Evolution at the Speed of Thought. The book is almost 500 pages long although Dr. Lo promised that it does not contain any equations.
One example of evolution in the financial markets is the lifecycle of a typical hedge fund strategy. Initially the strategy is unique and can generate significant alpha, but once others realize this opportunity it will attract competitors which reduces the opportunities to generate alpha to the point where it is non-existent. Therefore some strategies will mature and die according to the AMH, because the industry is not stable but instead an adaptive ecosystem.
Dr. Lo also touched on how a lot has been written about the poor absolute returns of hedge funds since the Great Financial Crisis. This is not a new phenomenon as there have been several cycles in the past when it was believed that hedge fund strategies were not working anymore, only to have them be successful in the subsequent years.
Dr. Lo’s research shows that even though the average return of single manager hedge funds has fallen to approximately half of what they had been prior to 2008, the risk-adjusted returns (as measured by the Sharpe ratio) have actually been stronger. This would indicate that the hedge fund managers still possess skill despite the disappointing returns on an absolute basis. Dr. Lo argued that this is because of less leverage being applied by managers, overall volatility in the financial markets being lower which is detrimental to a number of hedge fund strategies, and risk-free rates being at very low levels.
The presentation also discussed passive investing and what opportunities there are in the grey area between active and passive investment strategies. There was also an interesting foray into research conducted on how safer cars do not necessarily lead to less accidents and how this finding applies to investing.
Not surprisingly, the event was very popular and was quickly sold-out. The attendees enjoyed the entertaining presentation despite a slight delay in the beginning. The event took place June 9, 2018.
Have the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) changed how bond investors perceive the risks of investing in different countries’ sovereign bonds? ESM research finds that they have. Market returns, or yield, can shed remarkable light on the thinking of investors.
Comparing returns across markets provides insight, for example, into how investors perceive, evaluate, and rank the risks of investing in different markets. To discover the impact of Europe’s new rescue funds on investor perceptions, ESM researched the relative yield movements across the various European sovereign bond markets before, during, and after the recent economic and financial crisis. The research found that during the peak of the euro crisis, investors segmented the euro area into stable core and riskier periphery countries. But, from its establishment in 2010, investors gained confidence in the EFSF’s guarantee structure. They recognised the EFSF as an issuer that was as stable as a core country. And that, together with the stabilising effect of the rescue programmes, helped to reconnect the peripheral countries to the core.
At the height of the crisis, a two-tier bloc of countries emerges: the core is seen as stable, the periphery as risky.
Specifically, the research looked at the development of bond yield correlations. It found that market perceptions moved through different phases. Initially, before the crisis (e.g. 2004) and in its early phases, there were many years with strong positive euro-area wide correlations. At the height of the crisis, from 2010 to 2012, a two-tier bloc emerged. Investors treated a core bloc of Germany, France, the Netherlands, Austria, and Finland as less risky than a periphery bloc of Ireland, Greece, Spain, Italy, and Portugal.
The EFSF and ESM soon make their presence known, improving investor perceptions of the periphery.
The first EFSF 10-year bond, issued in June 2011, developed a correlation pattern similar to that of the core countries. In 2012, the year the ESM was established, rating downgrades subdivided the core, creating a sub-bloc of Belgium, France, and Austria. By 2013 and 2014, the impact of the European stability framework, with the two rescue funds as key players, was, however, palpable. Investor views of the core and periphery blocs stopped diverging, although uncertainty about the prolongation of the Greek programme was reflected in negative correlations between Greece and the core bloc in 2015. The other four countries under a rescue programme continued to re-attach to the core.
Bond investors’ strategies make the rescue ‘twins’ behave rather like sovereign issuers.
An in-depth understanding of the dependency structure of the euro area sovereign yields is also of importance for investors: stable statistical dependencies allow for stable risk reduction in a euro area bond portfolio, including EFSF bonds. European bond traders confirm that EFSF and ESM bonds are used for strategies that seek to take advantage of mispricing of similar assets, or relative-value strategies. This is unusual for supranational issuers, and makes the European rescue ‘twins’, the EFSF and ESM, look and behave rather like sovereign issuers.
This article is the summary of the paper as published in the ESM’s Annual Report in 2015. For more information, see the Working Paper: Schwendner, P., Schuele, M., Ott, T., Hillebrand, M. (2015) ‘European Government Bond Dynamics and Stability Prices: Taming Contagion Risks’, which is on the ESM website at www.esm.europa.eu.
This article was published in February 2017 by Peter Schwendner PhD, CFA