• Correlations, Data Frequencies & Expectations

    May 23, 2018
    Correlation, Return Expectations

    With the return of volatility this year, we’ve noticed that investors, journalists, and fund rating services immediately put alternative funds under the microscope to determine if they lived up to expectations. I recently wrote an article for Investment Advisor’s May issue discussing how many quickly concluded—incorrectly I might add—that alternative funds failed. This was a result of confusing low correlation with negative correlation, and by conditioning on risk statistics calculated with monthly returns.

  • Volatility Spikes Offer Less Time to React

    May 17, 2018
    Portfolio Construction, Volatility

    The only thing different about spikes in volatility this year might be the shorter time investors have to capitalize on them. Volatility has often risen sharply following unusually calm markets, but over the past decade the time in which the VIX reverts to normal levels after a spike has been shrinking.

  • What is Alpha and Why Should You Care?

    May 09, 2018
    Alpha, Return Expectations

    While the term “alpha” is widely used, in our experience, it’s not particularly well understood. Alpha, properly defined, is return in excess of what could have been expected given the risks assumed to generate the returns. Notice that this is not strictly outperformance relative to a benchmark, but rather, its relative performance given the level of risk taken.

  • The (Really) Long and Short of It

    May 03, 2018
    Andrea Coleman, CAIA
    Long/Short Equity

    After a somewhat rocky first quarter in equity markets, we noticed an uptick of advisors and firms searching for long/short equity strategies. As we’ve been involved in these discussions, we looked at some of the top performers in the category over the 3-year time frame and were surprised to see that some had outperformed the S&P 500 Index and/or MSCI World Index. This piqued our interest, so we decided to dig in.

  • We have talked about the VIX Index before, and have shown that it is predictive of future VIX levels, but is it predictive of future equity returns? First, we’ll see if there is a relationship between the VIX and S&P 500 price returns on the same day. The below analysis uses data from 1/1/1990 through 3/31/2018, with both daily and monthly periodicity.