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QUANTITATIVE INVESTMENT STRATEGIES: THE RISE OF RULES

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QUANTITATIVE INVESTMENT STRATGIES: THE RISE OF RULES

In today’s low-growth, low-interest rate environment, banks face manifold challenges across virtually every segment of their businesses. The challenges are especially acute in capital markets divisions where sweeping regulatory changes have made traditional business areas, such as market making,difficult to monetize and to manage. Such conditions have pushed many banks to broaden their activities to include new products and strategies. One area that has become a primary focus is the development of Quantitative Investment Strategies (QIS)to compete with traditional asset management products. This burgeoning area offers significant opportunities for both banks and investors.

A QIS is broadly defined as the application of statistical and financial rules to a content-based investment strategy. This rules-based approach aims to deliver attractive investment performance without the unpredictability and higher costs of active human management. QIS should not be confused with high frequency or algorithmic trading strategies, which seek to place trades at speeds and frequencies impossible for a human or conventional trading system.

The increase in QIS development has come in parallel with the explosion of investor interest in passive investment vehicles. According to Morningstar, assets in passively managed mutual funds have grown 230 percent to $6 trillion since 2007. QIS is evolving as an extension to passive indexing, an effort to tailor the composition or behavior of an index or investment strategy with a set of smart rules.

QIS comes in many forms. Some strategies are as simple as weighting stocks in an index according to revenues or cash flow instead of traditional market-cap approaches or choosing the highest yielding dividend stocks in a given universe.  More complex strategies can attempt to isolate exposure to specific factors such as value or momentum. Trend following or mean reversion strategies use pattern recognition to attempt to identify potential buy or sell signals. A given QIS tries to identify, based on history, a predictable pattern or persistence in market trends:  high dividend paying stocks may move higher; markets may revert to their mean or average price levels.   In creating these rules-based strategies, banks are able to strip away much of the “mystique” of active management and deliver sophisticated investment techniques with transparent guidelines and lower fees.

QIS strategies are delivered in a variety of vehicles to investors. Many institutional investors opt to receive the return of a specific strategy in the form of an OTC swap.  Others may choose to securitize the return in the form of a note or, increasingly, an ETF. A growing trend in the insurance market is to offer indexed annuity products tied to QIS strategies. As a natural extension of banks’ traditional derivatives expertise, many firms are offering options-based exposure to QIS.  This necessitates that the investment rules be clear and concise and that there be sufficient liquidity in the underlying instruments. Clearly many factors must be considered when determining the optimal delivery vehicle for a particular QIS. 

QIS provides advantages to banks and investors alike. For a bank’s capital markets group, a successful QIS business provides a content-based, predictable revenue stream. Almost all QIS strategies incorporate a transparent, disclosed fee that is paid based on outstanding notional and performance. Unlike a traditional capital markets business, which is purely transactional and resets to $0 at the beginning of the year, QIS looks more like an asset management business: recurring fees on a growing asset base which is content rather than risk focused.

For investors, QIS can provide access to tailored, transparent, rules-based strategies running the gamut from traditional markets to alternatives. QIS can combine the benefits of pure passive indexing with sophisticated techniques typically only available through active management. In particular, investors can employ QIS to access custom exposure to virtually any market factor or investment strategy at a fraction of the fees of alternative managers such as hedge funds. For many investors, the days of paying “2 and 20” for mediocre performance are over.

Given the regulatory and investment environment, the outlook for QIS is very positive.  QIS provides very significant advantages to investors and providers alike.  Banks are able to build scalable, fee-based and content-rich businesses while investors can gain transparent, tailored, rules-based exposure to an index or asset class.  In an era where the advantages of passive investing are causing a seismic shift in the asset management industry,the rise of QIS is a natural progression.

Donald Dye is a senior capital markets and private equity professional. He has held senior positions at Morgan Stanley and the Royal Bank of Canada. He is currently Chairman and founding partner of Sky Lake Partners LLC, a real estate private equity firm, which manages partner and client capital in multi-family real estates in New York City.

Investing

What is the procedure for proving a missing or lost Will?

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Intermediaries will be key to Investment Houses navigating the Covid19 crisis

By Alexa Payet, Partner at Bolt Burdon and listed specialist in the Certainty

Contentious Probate Hub & Area

Initial steps

When an individual dies it is necessary to search their paperwork to establish whether they made a Will and gather information regarding their estate. This is important because the personal representatives of the estate have a legal duty to distribute the estate correctly and could be held financially responsible for any mistakes made through any breach of duty.

Where a Will cannot be found but is believed to exist there are a number of steps that can be taken to help confirm its existence, including (but not limited to) the following:

  • making enquiries of the deceased’s family and friends;
  • making enquiries with the deceased’s professional advisors;
  • instructing The National Will Register to undertake a Certainty Will Search.

Presumption of revocation

Where the original Will is known to have been in the testator’s possession before their death and cannot be located afterwards, there is a rebuttable presumption that the Will was destroyed by the testator with the intention of revoking it. If an order for the proof of a copy is to be obtained then this presumption must be rebutted.

Procedure for proving a copy Will

The procedure for proving a copy Will is set out in Rule 54 of the Non-Contentious Probate Rules 1987 (‘NCPR’).

The application is made to the Probate Registry at which the application for the grant will be made and the order can be made by a district judge or registrar.

The application must be supported by evidence in the form of an affidavit (although during the global pandemic the rules have been amended by the Non-Contentious Probate (Amendment) Rules 2020, SI 2020/1059, to provide for the use of witness statements as an alternative to affidavits).

The evidence must set out the grounds of the application and any available evidence that the applicant can adduce as to the Will’s existence after the death of the testator or, where there is no such evidence, the facts on which the applicant relies to rebut the presumption that the Will was destroyed by the testator during his/her life.

The applicant must ensure that the Court has the best available evidence of what happened to the testator’s Will in order that effect may be given to his/her testamentary wishes.

It is important to understand that the applicant does not need to demonstrate that the Will has been lost (it is the fact of its loss which gives rise to the presumption of revocation). Instead, the applicant must establish, by evidence, that the Will was not in fact revoked.

What is a Certainty Will Search and why is it necessary?

A Certainty Will Search searches for Wills that have been registered on The National Will Register (circa 8.7 million Will registrations in the system) and for Wills that have not yet been registered in geographically targeted areas where the deceased used to live and/or work. A Certainty Will Search is extremely important as it will be necessary to notify the probate registry of any persons who would be prejudiced by the grant if the copy Will is proved. If no such person exists then the registrar is more likely to grant the application. Alternatively, if such a person does exist then you should seek to obtain their written consent to the application. The written consents can then be lodged with (or following) your application.

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Oil prices rise as investors look to higher demand seen in second half

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Oil prices rise as investors look to higher demand seen in second half 1

By Shadia Nasralla

LONDON (Reuters) – Oil prices climbed on Tuesday as optimism that government stimulus will eventually lift global economic growth and oil demand trumped concerns that renewed COVID-19 pandemic lockdowns globally are cooling fuel consumption.

Brent crude futures for March rose 72 cents to $55.47 a barrel by 1152 GMT after slipping 35 cents in the previous session.

“The perception that any retracement will be quick as confidence in economic and oil demand recovery is unlikely to fade away,” said PVM analysts in a note.

U.S. West Texas Intermediate crude was at $52.65 a barrel, up 29 cents. There was no settlement on Monday as U.S. markets were closed for a public holiday. Front-month February WTI futures expire on Wednesday.

Investors are upbeat about demand in China, the world’s top crude oil importer, after data released on Monday showed its refinery output rose 3% to a new record in 2020.

China also avoided an economic contraction last year.

Investors are watching out for U.S. oil inventory data from the industry association API, due on Wednesday, the same day U.S. President-elect Biden’s inauguration speech will likely give details on the country’s $1.9 trillion aid package.

The International Energy Agency cut its outlook for oil demand in 2021, but pointed to a recovery in demand in the second half of the year to an annual average of 96.6 million barrels per day.

“Border closures, social distancing measures and shutdowns…will continue to constrain fuel demand until vaccines are more widely distributed, most likely only by the second half of the year,” it said in its monthly report.

(Additional reporting by Florence Tan, editing by Louise Heavens)

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Can Thematic Investing provide investors with growth opportunities in uncertain times?

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The impact of COVID-19 on the investment market

New whitepaper from CAMRADATA explores

CAMRADATA’s latest whitepaper on Thematic Investing, considers the role this type of investing can play in asset management and explores trends that can permeate society and traverse sectors. The whitepaper includes insights from guests who attended a virtual roundtable on Thematic Investing hosted by CAMRADATA in November, including representatives from CPR Asset Management, Sarasin & Partners, Impact Investing Institute, PwC, Quilter Cheviot, Scottish Widows and Stonehage Fleming.

Sean Thompson, Managing Director, CAMRADATA said, “In these seminal times, thematic investing has the potential to shape how the future unfolds. Yet running a successful thematic fund is no easy feat – it is a bit like navigating unchartered waters trying to identify the trends and the long-term opportunities.

“Trends such as AI and biotechnology are still in their relative early days, for example, and global economies are undergoing dramatic changes. But mapping out certain trends, identifying potential sustainable returns through a unifying thread that spans multiple sectors, could help future-proof investments. “Our roundtable guests considered current key themes, which themes worked well, and which have not and how thematic investors could identify trends with the potential to offer future growth.”

The guests named themes they currently like which included artificial intelligence, China, climate change, clean energy, automation, evolving consumption, ageing, digitalisation, water, waste management, biodiversity, and board diversity.

After discussing themes that have worked or not, the guests looked at total allocation to themed funds, and whether clients might be blinded by themes to the overall risk exposure in their portfolios.

Key takeaway points were:

  • Themes have a habit of coming and going. One guest recognised that automation and robotics, for example, were cyclical, which means that investors will have to think carefully about entry-points.
  • It was agreed that the commodities ‘super cycle’ of the 2000s came about with the economic development of China. Many commodities-based products found their way into mainstream investing, but this is unlikely to happen again.
  • One guest was surprised by some of the themes that interested their customers; with their research showing that Board Diversity was almost the lowest-ranking concern among the ESG choices they listed.
  • There was correlation between environmental impact and social benefits to investing. The theme that concerns the Impact Investing Institute, which is less than two years old, is improved measurement of such relationships.
  • In terms of successful themes, one clear winner due to COVID had been digitalisation.
  • One theme that has not done so well is the Ageing theme focused on older people travelling and enjoying experiences abroad later in life.
  • One guest said their firm used themes for ideas generation, not as a shortcut for portfolio construction. They said themes lead to good ideas, but they then spend at least three months researching a stock, so that the best themes are represented by the best investments.
  • The final point was that there are sensitivities for any global investor in allocating to themes, even the biggest one of all, Climate Change.
  • But on a positive note, one guest added if all stakeholders can resolve their differences on definitions such as impact and ethical investing, then more capital will be readily transferred into opportunities.

The whitepaper also features two articles from the sponsors offering valuable additional insight. These are:

  • CPR Asset Management: ‘Central Banks: leading the path towards Impact Investing’
  • Sarasin & Partners: ‘Theme or fad? How to invest for the long term’

To download the Thematic Investing whitepaper, click here

For more information on CAMRADATA visit www.camradata.com

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