Inefficient benchmarking and trading opportunities

March 25, 2016

Academic research explains how benchmarking induces investment managers to buy overvalued highly volatile assets. This makes markets inefficient and may even lead to a negative relation between risk and return. It also offers opportunities for investment strategies. First, value investors can exploit the market’s proclivity to overvalue high-beta and high-volatility assets. Second, momentum traders can exploit the flows of funds in the benchmarked industry.

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How growing assets-under-management can compromise investment strategies

December 23, 2015

If investment funds maximize assets-under-management and end-investors allocate to outperforming funds, the investment process is compromised. A new theoretical paper suggests that asset managers may prefer portfolios with steady payouts (or steady expected mark-to-market gains) and neglect risks of rare large drawdowns, potentially leading to complete failure of parts of the options market.

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Leverage in asset management

October 24, 2015

Asset managers can use leverage to enhance returns. Outside hedge funds, such leverage is modest as share of assets under management. However, considering the huge volume of assets, changes in buy-side leverage still have a significant impact on financial conditions, particularly in emerging markets. Also, both theory and empirical evidence suggest that leverage is pro-cyclical.

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Liquidity risk in European bond markets

October 10, 2015

There are signs of liquidity decline and liquidity illusion in euro area government bond markets. Citibank research suggests that liquidity risk is rising due to increased capital requirements for dealers, reduced market maker inventories, enhanced dealer transparency rules, elevated assets under management of bond funds, and the liquidity transformation provided by these funds.

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How EM bond funds exaggerate market volatility

August 31, 2015

A new BIS paper provides evidence that since 2013 fluctuations in EM fund flows and EM bond prices have reinforced each other. Both redemptions and discretionary sales of fund managers have been pro-cyclical. In liquidity-constrained markets this behavior is prone to transmitting shocks and amplifying crises.

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A primer on benchmark index effects

August 15, 2015

An HKMIR paper explains benchmark index changes and shows their significant effects on mutual fund flows and international capital flows. Importantly, there is evidence for benchmark changes leading to an outperformance of upgraded assets, both at the time of announcement and the time of actual index adjustment.

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Trend chasing and overreaction in equity and bond markets

July 18, 2015

Empirical analysis suggests that equity and bond returns in international markets are driven mostly by shocks to expected future real cash flows. Moreover, they interact with mutual fund flows. In particular, there is evidence of short-term “trend chasing” and overreaction. Bond market returns and flows are also jointly driven by U.S. interest rate shocks.

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Understanding “shadow money”

June 7, 2015

The shadow banking system creates money or money-like claims mainly through repurchase operations: cash managers “park” funds through short-term secured lending, while asset managers borrow against their securities to gain leverage. Large institutions have few alternatives to collateralized lending for cash management. Institutional cash pools and “shadow money” have been expanding rapidly over the past decade.

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The rise and risks of euro area shadow banking

June 6, 2015

The non-bank financial sector in the euro area has doubled in size over the last 10 years. It has become a concern for three reasons. First, its tight links with regulated banks imply contagion risk. Second, investment funds’ supply of liquidity has become critical for many markets, but is pro-cyclical. And third, rising synthetic leverage aggravates pro-cyclicality of both market prices and liquidity conditions.

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Mutual funds and market dislocations

April 26, 2015

The IMF Financial Stability Report highlights two systemic weaknesses of plain-vanilla mutual funds: incentives for end investors to rush for the exit in distress and incentives for portfolio managers to herd. With deteriorating market liquidity and greater systemic importance of collateral values, these weaknesses become a greater concern for the global financial system.

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Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

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