Institutional Research

Academic Nerdiness and Proving the Obvious

Two research papers from my archives that I finally got to read. The first (here) studies short squeezes in a systematic fashion and argues that their magnitude is not as large as anecdotal evidence would suggest. This I like and would believe. The second (here) is also something I like but you won’t. It provides a mathematical presentation of basis risk and hedging efficiency.  Proving the obvious beyond any reasonable doubt is something only math geeks can love. You should be glad I don’t teach the risk management class in this quantitative manner.

Absolute Returns

In class, I occasionally grumble about absolute returns: where investment performance is measured without comparison to broad index benchmarks which is what most mutual fund appear to be concerned with. BELOW is the abstract of a paper discussing mutual funds that offer absolute returns.

ABSTRACT:  Are Absolute Return Mutual Funds Absolutely Absurd?
We study the universe of absolute return mutual funds and find no evidence they deliver positive alpha. Additionally, these funds can have significant factor exposures. Compared to ordinary equity funds, absolute return funds have much higher fees and turnover. They perform worse than their hedge fund counterparts. Overall, our results indicate that investors seeking absolute returns using mutual funds are likely to be disappointed.

2. Partially titled, “….Mr. Madoff goes to Singapore,”  the abstract BELOW talks about the curious performance of Temasek, Singapore’s sovereign wealth fund.

Financial data reported by Temasek Holdings and Singapore reveal problematic characteristics. First, Temasek reports an average annual return of 17% for 35 years despite Singaporean stock returns averaging less than 8% during this same time period. Given the range of stock market returns and its portfolio companies’ returns, it is highly improbably that Temasek has earned the returns claimed in its annual reports. Second, Singapore has become one of the most indebted countries in the world despite supposedly running large and sustained government surpluses. Given publicly available economic data on Singaporean finances, there is a minimum of $350 billion SGD or $275 billion USD unaccounted for from historical surpluses and financing operations. Third, given these results I find that for every $1 SGD in public borrowing, Singapore has received only 25 cents of publicly held Singaporean assets. Either financial returns have been drastically overstated or there are large unreported Singaporean controlled holdings.

Long-term Global Outlook for financial markets, courtesy Minyanville

These are lengthy pieces that consider many metrics , use many different pieces of data and blend a professional money manager’s interpretation with academic finance research results. Lots of graphs, charts and recommendations. Nicely done. Definitely worth a read.

  1. Commodities, 1-25-10
  2. Currencies, 1-26-10
  3. Macro-economics, 1-27-10
  4. Equities, 1-28-10