Connect with us

Investing

How Cash Efficiency in Indices, Derivatives and Managed Accounts may be Important to an Institutional Investor’s Well being

Published

on

How Cash Efficiency in Indices, Derivatives and Managed Accounts may be Important to an Institutional Investor’s Well being

By David Rudd, Chairman of Sigma Analysis & Management Ltd.

Background and Managed Account Mechanics

Accessing third party investments (hedge funds) via Managed Accounts is becoming increasingly accepted by the pension fund community and many other institutional investors.

What are the mechanics? Rather than investing in a fund offering sponsored by the hedge fund, the pension plan contracts with the hedge fund who then trades in an account owned by the plan or a surrogate. These trades are typically pari-passu with the fund offering of the hedge fund. The ownership of these investable assets and the trades remain with the Pension Plan or a surrogate.

The basic objective of this business model is transparency and risk reduction. Pension plans can also avail themselves of the many other attributes of managed accounts, from alpha identification, manager knowledge, liquidity, investment flexibility, improved fees and fee transparency, improved oversight /control and cash efficiency. The benefits available from a full managed account model are very significant.

Alpha Identification
Since the early days of “Risk Premia,” endowments and pension fund investors have tried to attribute alternative investment managers’ returns to a market subsector or phenomenon.  Large investors have engaged quantitative shops like Sigma to decompose hedge fund returns, provide a better understanding of the risks in their investments and examine strategy divergence if applicable.

Astute investors realized:

  1. In many cases, there was a market phenomenon (or premia) that accounted for much of a manager’s returns;
  2. One might be able to purchase the market phenomenon in the form of an index;
  3. One could access a hedge fund manager’s returns with a managed account for a very small cash outlay while reducing risk, reducing fees and getting total transparency and liquidity. The cash efficiency available in the managed account created a conundrum still facing institutional investors. This opportunity set, combined with risk premia, has encouraged a massive re-thinking of risk and return.

How valuable is Cash Efficiency?
Typically, a third party Global Macro manager that uses futures or derivatives might only require 10% of the capital for a managed account, relative to 100% for a fund investment. That means a traditional fund investment of $100 million would require a wire to a Caymans account (or some other distant entity) of $100 million compared to a managed account allocation of $10 million…quite a difference. While futures and derivatives are the most capital efficient way to access a market or strategy, there are significant benefits to having a managed account for strategies that utilize equities or debt, particularly if the strategy is meant to be market neutral/market independent.

The cash efficiency available from managed accounts plus low-cost access to derivatives such as the S&P 500 Index (costing 5 basis points or less and zero cash outlay) is an investment game changer. The use of managed accounts and derivatives is the lifeblood of excess returns, and in a less than favourable environment, it could be the singular savior.

Why invest cash in trying to generate returns from equities when you can invest in equity indices without cash and get the same or better economic effect at a lower cost? That isn’t a trivial question. It’s the essence of the question every pension plan, endowment, family office and investor should have asked and answered. As a result, a much higher bar can be set before allocating to private equity or attempting to stock pick.

In the case of pension funds, if a plan is underfunded, or even if they want to stay fully funded, they should attempt to use cash efficiently. They should look to indices, and overlay cashless, complementary risk, and they really should use managed accounts for hedge fund investments.  Any underfunded plan that buys private equity may consign themselves to a continued underfunded status as that path can’t utilize managed accounts and chews up cash. Any plan that doesn’t use managed accounts when allocating to a hedge fund is undervaluing the opportunity cost of cash and may be overestimating and overpaying for the unique skill the hedge fund possesses

Prevailing pension plan investment orthodoxy is to match assets with liabilities. In an era where the future economic value of asset ownership is available without deployment of the asset, one must question this orthodoxy of matching assets and liabilities. A risk-based approach looks at the world differently.

Moving to a Risk-Based Approach 
Historically, a pension plan’s core investment approach has been via an asset mix strategy. In recent years, the major Canadian pension funds have moved to a risk-based approach, rather than an asset allocation methodology.  These and other large investors seek to deploy return seeking exposures while at the same time, reducing overall risk. Many of the pension plans who conserve cash via a risk-based approach are allocating that cash to private equity and infrastructure. As we know, private equity is illiquid, is often highly correlated to public equity and has a fee structure that is usually higher than most hedge funds. The viability of that premium will be a topic of continuing discussion long into the future.

Conclusion 
It has been a great run. From March of 2009 through July of 2018, the S&P 500 has more than quadrupled. From its pre-crash high in 2007-8, the index has more than doubled. Abnormally low interest rates and bond yields have been a significant driver of those returns. What will be the relationship between bonds and equities going forward? Is there a bond/equity scenario that could really hurt pension plan funding? It might be time to think differently. Cash-efficient allocations via managed accounts enable investors to diversify risk, improve returns, reduce fees and gain liquidity.

About Sigma Analysis: A firm of market professionals, mathematicians and data scientists. Sigma delivers investment solutions to Pension plans via custom-built cash efficient, liquid and cost-efficient vehicles.

Investing

Is It The Right Time To Invest In Gold?

Published

on

Is It The Right Time To Invest In Gold? 1

By Zoe Lyons, Hatton Garden Metals

The current climate is one of uncertainty, so it can be difficult to know what to do with your money, particularly investments. When faced with the decision on what to do with your savings, there are a number of options, but one investment which many have opted for over the years is gold buying.

Purchasing gold can be a great investment. Although the price of which can fluctuate just like anything else, the value of gold has generally tended to increase at a good rate and many prefer it over other saving options. With bank interest rates currently at a low and discussions of negative interest rates, many are opting to purchase gold as a way to earn money on their savings.

So is gold buying right for you? We take a look at some commonly asked questions when it comes to purchasing gold.

Why Should I Buy Gold?

Buying gold is often seen as a good investment due to value increases, so you may be able to make a profit from selling it on if the price of gold increases after you have purchased. The price can fluctuate, so profit is not guaranteed and is based on a number of factors. Looking back over previous years since the 1970s, the value of gold has prospered compared to other investment types, albeit with some dips in value at certain points over the past 50 years.

Buying gold also allows you full control as you are the owner. So you can choose if and when you want to sell.

Buying Gold Vs ETFs

When looking at investment opportunities, you may consider ETFs. An ETF is an Exchange Rated Fund, which when purchased is similar to buying stocks and shares. They can be a good investment, but is it more beneficial than purchasing gold?

When purchasing physical gold you will need to consider where to store it. This can incur charges, whereas with an ETF there is no need for storage, but an ETF can come with admin charges and investment management costs. When you choose to sell an ETF, you may also be required to pay a commission, which are often small amounts, but can add up if you are an active trader. There is also less control with an ETF as the price of which can change and is based on the company’s actions.

Gold Bars Vs Gold Coins

If you do choose to purchase gold, you will be faced with the option of whether to buy gold coins or gold bars. Although similar, they have varying benefits.

  • Gold Coins

The purchase of gold coins are often favoured by those who appreciate the historic value of the coin. Many people collect coins, so an investor may be inclined to pay more if they are a keen collector of such. Many may also pay more for gold coins based on their rarity. These factors can affect the price you pay or sell at, meaning the value of gold coins is not solely deemed by the live price of gold, so you may receive a higher price, dependent on the investor. This allows the price of gold coins to be more fluid than gold bars.

  • Gold Bars
Zoe Lyons

Zoe Lyons

Gold bars are not seen as a collectors item and don’t tend to have historical attachments. Because of this, the price is not influenced by these factors and is based on the weight, purity and the live price of gold at the time of selling or purchasing. This allows for a more accurate estimate of the price of your gold bars.

Where Should I Store Gold?

One of the most frequently asked questions when it comes to gold buying is storage. If you do choose to purchase gold, you will need to consider storage. Just like anything else of a high value, it needs to be stored securely. Simply keeping gold stored at home could be risky. When kept in your property, if not stored in the correct conditions, it is more susceptible to damp and corroding. There is also the possibility that your home insurance does not cover your gold, so if you are burgled, you could lose your investment. Because of this, it is wise to protect your gold with proper secure storage. Look for companies that offer storage abilities that are covered by insurance and be sure to do your research on pricing and look for cost effective storage as the fees incurred can soon add up. You may also want to look for a company that allows you quick and easy access to your gold to ensure you can buy and sell with ease.

Should I Invest In Silver Too?

Although gold is often a more popular investment option, many choose to purchase silver alongside it. The price of silver tends to be much more volatile than the price of gold, for this reason, many see gold as a safer choice. The price of silver will still have an intrinsic value but may be more worthwhile for those looking into long term investment options due to its VAT charges.

Negative Interest Rates

Although it is not a current practice, there has been recent talk of banks in the UK potentially introducing negative interest rates. If a savings account has a negative interest rate, this could mean you are charged for keeping money in the bank. If introduced, this could mean savers lose out. Instead of receiving interest on your savings, you may be charged a rate for keeping your money in the bank.

Could purchasing gold be a better option for your savings? Possibly, but this will depend on how much you have saved and the rates of the negative interest (if they are introduced). They may be minimal, but if you have a large amount in a savings account, this could add up to an expensive charge. If you choose to use your savings to buy gold, you may make a profit upon selling, but you will need to consider costs of storage as well as the chances of the price decreasing in the future.

So, is it the right time to invest in gold? It’s a very popular question. Hopefully the above will give you a bit more insight into gold investing and how it may work for you, but with any investment, there is never a guarantee that it will generate profit, so take careful considerations when diversifying your portfolio.

Continue Reading

Investing

Private public investment is more inter-dependant than ever

Published

on

Private public investment is more inter-dependant than ever 2

By Konstantin Sidorov, CEO and Founder of London Technology Club

Today, one thing unites the majority of governments around the world: their fiscal position is destitute. COVID 19 has seen an extraordinary, forced expansion in public sector expenditure, which has come just as the world was getting back on its feet following the Global Financial Crisis. The financial strains are already showing and will become more apparent as we move through the pandemic into social and economic recovery.

If you want to understand the impact that the re-focusing of public sector spending is having, then there is no better example than the space economy. In the US and Europe, we are becoming increasingly reliant on the space rockets and space launch companies pioneered by private investors and entrepreneurs.

NASA, that powerhouse and flag bearer for American national pride, is having to partner with the private sector in order to fulfil their missions. Private investors, the likes of Elon Musk, and Jeff Bezos alongside smart use of new technologies have brought the economics of space down and the excitement around what’s possible up. With it comes a whole satellite manufacturing, launch and servicing industry growing to $271bn in revenues in 2019. Of the total revenues in the space economy ($366bn in 2019), government space budgets made up $95bn of that.

Commercial entities, being patiently built and backed by private capital willing to dig deep and progress their own missions has helped fuel the space economy. Many are realising now just how crucial space is for the future of a country’s protection, position in the world and prosperity. In China, India and Russia we still see significant public sector expenditure in space projects as an agent for military and economic expansion. The role of private investors in plugging major gaps in public sector funds and national pride in Western economies is therefore increasingly important.

Private and public investment must be seen as a partnership. We should not forget that Elon Musk’s SpaceX survived from the brink of collapse only because of a ten-figure NASA contract awarded at the last minute. Musk, since then, has looked for public infrastructure contracts to fuel his companies, the likes of The Boring Company winning the contract to build a downtown-to-airport loop, a  government program for high-speed transport in Chicago. Musk proves his products and services work and then secures lucrative government contracts in order to quickly scale which in turn leads to transforming whole industries.

It’s not just space infrastructure where we see this redefinition of the role of public and private finance. The Chinese have invested at least US$160 billion in infrastructure projects as part of the Belt and Road Initiative, creating roads, ports, energy infrastructure and providing aid to foreign governments to create the most ambitious infrastructure project the world has yet seen.

Konstantin Sidorov

Konstantin Sidorov

For Western countries, access to that scale of public finance is not fiscally-possible, a new solution is needed and just as the space race has been redefined by private capital, so will the development of new industries, infrastructure and the reinvigorating of economies facing structural change that has been accelerated by COVID.

Private capital has the huge advantage of being driven by conviction and competence. It can cost-effectively be deployed, fast and targeted with a laser-like focus by entrepreneurs who know exactly what they want to achieve. Private capital, currently, is also in abundance.

In a world which is providing slim returns across multiple traditional asset classes, private capital is being stockpiled and is waiting for the opportunity to be invested for growth. We need private investors to have the confidence to deploy their capital to fuel the system once again.

This new world, post COVID, won’t see public capital replaced. Its role is likely to focus more heavily on health, welfare and critical infrastructure. However private investors will step in where gaps appear. Ten years ago, the scale and ambition of private space companies would have been greeted with snorts of derision and looks of disbelief. Today governments embrace the private capital, and regard the companies that have deployed it as systemically important national assets.

As we look to the future, huge macro trends emerge that demand significant investment: the aging population, the threat of pandemic, the drive to create a sustainable economy and lifestyle, the need to decarbonise, the digital revolution. The list goes on.

Public finance cannot hope to provide the finance and pioneer the bold thinking and accept the risks required to find new solutions that drive us forward in a world of change. That role goes to the private investor and private capital.

For the investors themselves the opportunities are immense, and for society as a whole they are just as big. As we look forward public and private sector needs to embrace private capital. Rather than fearing private investors as locusts who strip organisations and opportunities of profit then fly away, a narrative that gained traction after the last great economic crash. This time we need to see private capital as agents for positive transformation. Private-public partnerships fuelling each other.

Private money is already building rockets that send people and payloads into space, but that isn’t the final frontier for entrepreneurial investors or the societies and economies that benefit from their boldness.

Continue Reading

Investing

What should I invest and How do I invest

Published

on

What should I invest and How do I invest 3

By Imogen Clarke, The Fry Group

With all the uncertainty that has arisen from 2020, with lockdown threatening businesses and the warning of a second wave, the topic of investments has taken on new meaning. Nowadays, more people are concerned with what makes for a good investment, or, if you’re a novice, how to best invest.

For instance, you might be unsure about the reliability of the company you’re looking to invest in, as well as the long-term prospects of your investment.

If you are unsure of your investments, then it is best to seek advice from financial experts like The Fry Group, who deal with tax, wealth and estate planning. They will see that you have a strong financial plan in place to help meet your objectives. They will develop a strategy that is built around your needs and asses any risks that could hinder your plans.

There are some things you’ll need to consider for your strategy; for instance, are you looking to make investments that are more of a risk and will take longer to come to fruition? Or, alternatively, are you wanting a faster approach that will result in a steady income? Whether or not you decide to play it safe all depends on your current financial situation and whether you have the means to take more of a risk. Do you have any other debts that take precedence over your future plans? Is your investment strategy realistic?

With the aid of a specialist – or investment manager – you can design an investment concept that works for you and your goals, and start to build a regular income from your investments. There are four main areas when it comes to assets (groups of investments) that you can consider:

  • Equities
  • Bonds
  • Alternatives
  • Cash

Your investment manager will test the risks associated with your investment, and if it proves to be a positive investment choice, then you will be able to invest more over time.

So, how do you decide where to invest?

According to The Fry Group, ESG investing (Environmental, Social and Governance) is a good option for investors looking to support businesses that meet their similar ethics.

The main areas of ESG investing include:

  • Environmental challenges (climate change, pollution, etc)
  • Social issues (human rights, labour standards, child labour, etc)
  • Governance considerations relating to company management

According to The Fry Group, “Many investors choose to consider ESG investing in order to ensure any investment decisions reflect personal beliefs and values. As a result, they choose to support companies who are making informed, responsible decisions which take into account their wider societal and global impact. In this way investors can achieve peace of mind that their investments are creating a positive effect.”

ESG investing is also more relevant now than ever, as more businesses are looking to present themselves as an environmentally conscious corporation that recognises the values of their consumers.

As The Fry Group puts it, “In the past, ESG investing has been seen as a niche investment approach, for a relatively small number of people with specific requirements. This has changed significantly in recent years, with a growing awareness of environmental issues such as climate change and an increasing understanding of social issues and human rights. As a result, many people are increasingly interested in reflecting their opinions and lifestyle choices through the way they invest.”

So, if you want your investments to pave the way for your personal values and reflect your own morals, then this is the route to go down. But how does it all work?

There are four areas of ESG investing:

  • Responsible ownership and engagement: when companies are encouraged to make necessary improvements.
  • Avoidance or negative screening: whereby businesses are ‘graded’ based on how ethical their business practices are and are avoided altogether if their methods are not approved.
  • Positive screening strategies:when companies meet the ESG goals and are approved for investments.
  • Impact investment strategies: the purpose of this is to use investment capital for positive social results such as renewable energy.

You will need to take into account your own personal objectives as well as the objectives that meet the ESG investment criteria. And, in terms of financial performance, ESG investing can be hugely beneficial. Those who opt for ESG investing perform a more in-depth analysis into long-term and future trends that affect industries, meaning that they are better prepared for changes in consumer values when they arise. And, with all the unpredictability that this year has offered us so far, isn’t it better to do the research and have all angles covered?

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Call For Entries

Global Banking and Finance Review Awards Nominations 2020
2020 Global Banking & Finance Awards now open. Click Here

Latest Articles

Mastercard Delivers Greater Transparency in Digital Banking Applications 4 Mastercard Delivers Greater Transparency in Digital Banking Applications 5
Banking9 hours ago

Mastercard Delivers Greater Transparency in Digital Banking Applications

Mastercard collaborates with merchants and financial institutions to include logos in digital banking applications Research shows that ~25% of disputes...

Success beyond voice: Contact centres supporting retail shift online 7 Success beyond voice: Contact centres supporting retail shift online 8
Business9 hours ago

Success beyond voice: Contact centres supporting retail shift online

As the nation continues to overcome the challenges presented by COVID-19, customers have shifted their channel preferences, and contact centres have demonstrated...

7 Ways to Grow a Profitable Hospitality Business 9 7 Ways to Grow a Profitable Hospitality Business 10
Business10 hours ago

7 Ways to Grow a Profitable Hospitality Business

Hospitality requires charisma and innovation The hospitality industry is a multibillion-dollar industry with lots of career opportunities in hotels, theme...

AML and the FINCEN files: Do banks have the tools to do enough? 16 AML and the FINCEN files: Do banks have the tools to do enough? 17
Banking10 hours ago

AML and the FINCEN files: Do banks have the tools to do enough?

By Gudmundur Kristjansson, CEO of Lucinity and former compliance technology officer Says AML systems are outdated and compliance teams need better...

Finding and following your website’s ‘North Star Metric’ 18 Finding and following your website’s ‘North Star Metric’ 19
Business10 hours ago

Finding and following your website’s ‘North Star Metric’

By Andy Woods, Design Director of Rouge Media The ‘North Star Metric’ (NSM) is one of many seemingly confusing terms...

Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape 20 Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape 21
Top Stories11 hours ago

Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape

By Charles Southwood, Regional VP – Northern Europe and MEA at Denodo The wide-spread digital transformation that has swept the financial...

Risk assessment: How to plan and execute a security audit as a small business 22 Risk assessment: How to plan and execute a security audit as a small business 23
Business11 hours ago

Risk assessment: How to plan and execute a security audit as a small business

By Izzy Schulman, Director at Keys 4 U Despite the current global coronavirus pandemic and the uncertainty it has placed...

Buying enterprise professional services: Five considerations for business leaders in turbulent times 24 Buying enterprise professional services: Five considerations for business leaders in turbulent times 25
Business12 hours ago

Buying enterprise professional services: Five considerations for business leaders in turbulent times

By James Sandoval, Founder and CEO,  MeasureMatch  The platformization of professional services provides businesses with direct, seamless access to the skills...

Wireless Connectivity Lights the Path to Bank Branch Innovation 26 Wireless Connectivity Lights the Path to Bank Branch Innovation 27
Technology13 hours ago

Wireless Connectivity Lights the Path to Bank Branch Innovation

By Graham Brooks, Strategic Account Director, Cradlepoint EMEA As consumers cautiously return to the UK high street in the past...

Financial Regulations: How do they impact your cloud strategy? 28 Financial Regulations: How do they impact your cloud strategy? 29
Technology13 hours ago

Financial Regulations: How do they impact your cloud strategy?

By Michael Chalmers, MD EMEA at Contino How exactly do financial regulations affect your cloud strategy? It’s a question many of...

Newsletters with Secrets & Analysis. Subscribe Now