Tag Archives: calendar

We Don’t Think Volatility Is An Effective Hedging Signal. Here’s Why

By Jeremy Schwartz , Director of Research and James Wood-Collins, CEO of Record Currency Management In a recent blog post , we outlined why volatility is not among our preferred currency-hedging signals. To recap, by definition, volatility does not indicate a specific direction of a currency pair, and it would lead to opposite conclusions for U.S.-based investors compared to internationally based investors. But to expand on the analysis, consider the following: If there were a correlation between volatility and, say, U.S. dollar strength or weakness AND if an investor were willing to rely on this correlation persisting, then perhaps a more or less volatile environment could be taken to indicate the likeliness of U.S. dollar strength or weakness. However, although such correlations have been observed sporadically in the past, they have not proved persistent. The chart below shows the correlation between historic volatility (measured as the standard deviation of daily spot movements over a rolling 63-day window at successive month-ends) and the returns from being long U.S. dollar in a hedge against each of the euro, Japanese yen and pound sterling in the following month. Although there have been times when this correlation was positive at a statistically significant level, it has also been negative at times, and overall has proved highly sporadic and unstable over the full period shown. 36-Month Rolling Correlation: Currency Pair Spot Rate Volatility (63 days) vs 1m Passive Hedging Return (Long USD, 1m Lag) Click to enlarge Using volatility as a currency-hedging signal could therefore be a classic case of relying on a sporadic correlation that has emerged from time to time and naively assuming that it will continue into the future. It is worth asking, though, why this correlation emerged. We attribute it to the ” safe-haven ” status that the U.S. dollar acquired at times during the financial crisis of 2008-2009 (indeed, it’s noteworthy that even in this period, returns from being long U.S. dollar frequently had the lowest correlation with volatility, and hence safe-haven status, when measured against the Japanese yen, itself a regional safe haven). Should we expect this status to persist? To some degree, U.S. Treasuries will always be seen as one of the world’s safest asset classes. However, if U.S. dollar interest rates continue to increase, it’s possible the dollar becomes more of an “investment” than a “funding” currency in certain currency strategies, in which case we would expect its risk sensitivity to increase and safe-haven status to diminish. Therefore, relying on the sporadic correlation seen in the past could be even more unreliable in a rising U.S. dollar rate environment. All of this reinforces why we favor three directional signals in applying our hedge ratios . Higher U.S. interest rates, the momentum of the U.S dollar or an undervalued dollar will all signal to U.S. investors to hedge their euro exposure, while also being a signal to euro-based investors not to hedge their U.S. dollars. These three signals are thus consistent by virtue of being directional. Volatility does not share this feature and relies on a weak link between the correlation of U.S. dollar volatility and the strength of the U.S. dollar. Given the multitude of factors at play impacting currency markets, relying on this correlation of volatility to stay positive for an extended period seems a bet we would not be willing to take. Hedging can help returns when a foreign currency depreciates against the U.S. dollar, but it can hurt when the foreign currency appreciates against the U.S. dollar. No WisdomTree Fund is sponsored, endorsed, sold or promoted by Record Currency Management (“Record”). Record has licensed certain rights to WisdomTree Investments, Inc., as the index provider to the applicable WisdomTree Funds, and Record is providing no investment advice to any WisdomTree Fund or its advisors. Record makes no representation or warranty, expressed or implied, to the owners of any WisdomTree Fund regarding any associated risks or the advisability of investing in any WisdomTree Fund. Jeremy Schwartz, Director of Research As WisdomTree’s Director of Research, Jeremy Schwartz offers timely ideas and timeless wisdom on a bi-monthly basis. Prior to joining WisdomTree, Jeremy was Professor Jeremy Siegel’s head research assistant and helped with the research and writing of Stocks for the Long Run and The Future for Investors. He is also the co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” and the Wall Street Journal article “The Great American Bond Bubble.”

Do Stock Spinoffs Still Outperform? A Summary Of The Research

Ever since I read, You Can Be a Stock Market Genius , I’ve been fascinated with stock spinoffs. The book is written by Joel Greenblatt, who is a certified rock star in the value investing community. When he was running his highly concentrated hedge fund, he returned over 50% annually for a decade. Incredibly impressive. In the book, Greenblatt devotes chapter 3 to spinoffs. In that chapter, this line caught my eye: There are plenty of reasons why a company might choose to unload or otherwise separate itself from the fortunes of the business to be spun off. There is really one reason to pay attention when they do: you can make a pile of money investing in spinoffs. The facts are overwhelming. Stocks of spinoff companies, and even shares of the parent companies that do the spinning off, significantly and consistently outperform the market averages . Now this book was written in 1997. Since then, many a hedge fund manager has read the book and the “spinoff anomaly” is relatively well known. You would think that this inefficiency in the market would fade with time as more investors look to exploit it. As such, I wanted to review all studies that are available to see if spinoffs still do, in fact, outperform. Here is what I found: Here are the links to learn more about each study: Restructuring Through Spinoffs: The Stock Market Evidence J.P Morgan Research Report Corporate Spinoffs Beat The Market Credit Suisse: Do Spinoffs Create or Destroy Value The Stock Price Performance of Spinoff Subsidiaries, Their Parents, and the Spinoff ETF Global Spinoffs & The Hidden Value of Corporate Change In short, the answer is “Yes, spinoffs still outperform.” If you want to invest in spinoffs, consider investing in the Guggenheim Spinoff Index (NYSE: CSD ). But if you would prefer to pick your own spinoffs, stay tuned. I will be publishing a series of articles on the stock spinoff market and how to pick the winners. If you would like to read them, follow me on Seeking Alpha and you will be notified when I publish new research. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Advisors May Need To Make Changes To Win HNW Business

High-net worth (“HNW”) investors, which are defined as households with investable assets between $5 million and $25 million, accounted for one-quarter of the nearly $64 trillion U.S. investable asset share in 2015. Obviously, HNW investors are highly prized by most financial advisory firms, but aspiring advisors often underestimate the breadth of business changes that are required in order to properly serve these customers, according to a recent white paper published by BNY Mellon’s Pershing: What Wealth Wants: Refining Your Firm’s Approach to the High-Net-Worth Market . Some of the required business changes may include: Addition of new services Expanded set of financial planning products and solutions Higher service standards Ability to scale More staff Increased spending on operations and technology Pricing adjustments “Serving this segment successfully is not just a matter of identifying prospects and converting them,” said Katie Swain, director of financial solutions at Pershing, in a statement. “It requires a substantial evolution and transformation of a firm’s approach to service and infrastructure to ensure that HNW clients can be profitably and sufficiently served over the long term.” Wirehouses and private banks were the types of firms that traditionally served the HNW market. More recently, however, independent advisory firms have been expanding their capabilities in pursuit of HNW business — and they’ve been successful, thanks in part to their ability to generate greater customer satisfaction by providing more individualized service. “HNW clients’ expectations for customized solutions are driven by the complex and unique circumstances they experience in their lives,” said Gabriel Garcia, director of relationship management at Pershing Advisor Solutions. “They seek solutions for leveraging existing intangible assets in a way that minimizes interest costs and tax consequences, and advisors need to deliver these services in a seamless way.” For the independent advisors that succeed in winning HNW investor business, the rewards are lucrative. The average client size for an advisor serving HNW investors is more than 30 times that of an advisor serving clients with less than $1 million in assets under management. For more information, download a pdf copy of the white paper .