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Protecting Against Inflation: Evaluating Inflation Hedge Misconceptions and Strategies

The financial media are full of conjecture about which strategies might effectively hedge inflation risk or not. Here we explore which asset classes, if any, have been effective at protecting against inflation risk. First, it is helpful to address some common logical and analytical misconceptions about hedging inflation risk.

Focus on Correlation, Not Volatility

When evaluating whether an asset class effectively protects against inflation, the focus....

Perspective on High-Frequency Trading

I have received a number of questions since “60 Minutes” ran a piece on high-frequency trading (HFT) on March 30 (lest we forget, this is the same “60 Minutes” that ran a piece in 2010 that predicted the municipal market would implode in 2011, and we all know how that turned out). I’ll summarize what I think we know about HFT at this point, a viewpoint that runs counter to the perspective offered on “60 Minutes.”....

Smart Beta Can Be Smart But Is Not New

I held off writing about smart beta strategies as long as I could. The world, after all, is awash in such pieces. I couldn’t ignore it any longer, though, because virtually every piece I’ve read that’s critical of smart beta misses one fundamental point: The term “smart beta” may be new (and has certainly been effective from a marketing perspective) but the underlying strategies themselves are not.

Most of the debate has centered on the non-market-capitalization weighting schemes of smart be....

Do Corporate Bonds Add Value in Portfolios?

I frequently get asked about the merits of corporate bonds, both investment-grade (IG) and high-yield (HY), relative to government and municipal bonds. I don’t believe the risk-return profile for long-term investors (particularly taxable individual investors) is improved by owning IG or HY corporate bonds compared with simply owning a diversified portfolio of stocks and high-quality government bonds.

The key here is to understand that corporate bonds are essentially nothing more than a ....

A Broader Look at Hedge Fund Returns Data

In a recent video blog, I examined the dubious nature of the reported performance analytics of three different hedge funds. As I noted, most hedge funds report risk-adjusted performance and correlation measures based off of monthly returns data. Because a significant number of hedge funds appear to calculate monthly returns using stale prices, these measures make hedge fund results look better than they actually are. Now, I’m going to illustrate how these same biases exist in....

Video Blog on Interpreting Hedge Fund Returns Data
In this video blog, I walk through an example of how I responded to a prospective client who was interested in investing in hedge funds that looked particularly enticing based on their marketing collateral.
Bond Funds Aren’t Naturally Riskier Than Individual Bonds
In spending significant time talking to clients and wealth advisors about fixed income, one common misconception is that bond funds are more exposed to interest rate risk than laddered individual bond portfolios. The logic basically starts and ends with the observation that individual bonds can be held to maturity while bond funds don’t necessarily hold all bonds until they mature. Because all individual bonds can be held to maturity, as the logic goes, it doesn’t matter if their prices go up or down in the interim. ....
Positive Developments for Municipal Bond Investors
Public pension underfunding at the state and local level has rightly received an enormous amount of attention over the past few years. Most public pension funds are significantly underfunded when pension liabilities are valued using economically reasonable assumptions. In fact, Moody’s has calculated total underfunding to be roughly $1.8 trillion as of 2011, meaning the total value of pension fund assets is roughly $1.8 trillion less than the amount these funds owe to current and future retirees. From a municipal bon....
Do Private Equity Investments Outperform?

The initial academic work on the returns of private equity investments generally found underperformance relative to public market benchmarks like the S&P 500. More recent research, which apparently uses higher-quality data, is coming to the opposite conclusion. But is it really? Professor Ludovic Phalippou from the University of Oxford argues that while this recent research appears to be valid, the S&P 500 isn’t the

Video Blog on Understanding the Current Fixed Income Market

In this video blog, I look at what are some reasonable expectations from the fixed income market given where rates are.

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