November 30, 2010
November 17, 2010
November 10, 2010
ReInsurance and Discounted Book Value - The New Normal?
ReInsurance executives are painfully aware of their discounted valuations as measured by enterprise book values. With an excess of underwriting liquidity and a soft market for short tailed liabilities, Reinsurance executives point to "the cycle" as the culprit, implying better days ahead. Many believe that capacity destruction through reduced capital (either via buybacks, special distributions or industry loss) will create a tighter market, hence bankable premiums and an expansion in enterprise values.
With real interest rates zero to negative and nominal rates near zero, it makes sense that the short tailed trade (CAT) has become flooded with capital (pun intended). These near zero investment rates mean that Reinsurers are completely reliant on underwriting returns in the short tail.
Reinsurance price to books have typical ranged from 0.85 to 1.6 with the current idiosyncratic environment driving books in a lower 0.7 to 1.0 range.The industry assumption is that the soft market, low combined ratios, and historically weak returns on capital have collectively caused investors to discount Reinsuance enterprise values.
But every actuary knows that correlation does not imply causality. The discounted book state that the industry finds itself in could be the aggregate result of some emerging factors that may lead to a new normal in valuations.
Consider the alternative: The ISL ILW secularized market is gaining traction as the returns (having shown uncorrelated to credit) are reinforcing alternative asset investor's view that insurance exposure is an asset class. The long awaited adoption of securitized reinsurance is no doubt catalyzed by an extremely favorable comparison to near zero investment yields. It is important to understand that this short tailed exposure can be accessed at par. This means that an investor can gain access to short tailed reinsurance exposure at or near the equivalent enterprise value of book.
Another factor that may influence discounting is the market's fear of financial non transparency, driven by the events and subsequent disclosures of 2008. Reinsurance accounting allows for some flexibility in loss reserves that make the tangible nature of book difficult to grasp. It seems reasonable for a rational investor to discount this uncertainty, particularly in light of the existence of a fully transparent alternative means of access.
And finally, as underwriting returns in the short tail should be more volatile than investment returns in the short tail, and the mix of return contribution shifts to 100% liability returns, it would be logical for investors to factor in the volatility of the enterprise returns when considering valuation.
Dismissing the impact and persistence of these emerging factors in explaining the current state of reinsurance price to book valuations, may prove wishful thinking. Of course future book premiums may be in the offing, but these new headwinds certainly won't facilitate that scenario. Alternative access will most likely keep a tight lid on book values for short tail predominated businesses, while the uncertainty in the meaning of reinsurance book value will weigh heavily on valuations.
Of course there are actions Reinsurers can undertake, given the current valuation and interest rates environment. Reinsurers capital structure can be adjusted by swapping equity for debt on the balance sheets. Accretive buybacks of equity and access to cheap financing make for a compelling argument.
Regardless of the course of action existing Reinsurers take, new entrants will find capital formation difficult in an environment where sub book investment alternatives persist. In turn, alternatives will continue to gain traction. Paradoxically, discounted book itself may help facilitate a further adoption of alternative structures at the cost of traditional company capital formation, thereby reinforcing the persistence of discounted book.
With real interest rates zero to negative and nominal rates near zero, it makes sense that the short tailed trade (CAT) has become flooded with capital (pun intended). These near zero investment rates mean that Reinsurers are completely reliant on underwriting returns in the short tail.
Reinsurance price to books have typical ranged from 0.85 to 1.6 with the current idiosyncratic environment driving books in a lower 0.7 to 1.0 range.The industry assumption is that the soft market, low combined ratios, and historically weak returns on capital have collectively caused investors to discount Reinsuance enterprise values.
But every actuary knows that correlation does not imply causality. The discounted book state that the industry finds itself in could be the aggregate result of some emerging factors that may lead to a new normal in valuations.
Consider the alternative: The ISL ILW secularized market is gaining traction as the returns (having shown uncorrelated to credit) are reinforcing alternative asset investor's view that insurance exposure is an asset class. The long awaited adoption of securitized reinsurance is no doubt catalyzed by an extremely favorable comparison to near zero investment yields. It is important to understand that this short tailed exposure can be accessed at par. This means that an investor can gain access to short tailed reinsurance exposure at or near the equivalent enterprise value of book.
Another factor that may influence discounting is the market's fear of financial non transparency, driven by the events and subsequent disclosures of 2008. Reinsurance accounting allows for some flexibility in loss reserves that make the tangible nature of book difficult to grasp. It seems reasonable for a rational investor to discount this uncertainty, particularly in light of the existence of a fully transparent alternative means of access.
And finally, as underwriting returns in the short tail should be more volatile than investment returns in the short tail, and the mix of return contribution shifts to 100% liability returns, it would be logical for investors to factor in the volatility of the enterprise returns when considering valuation.
Dismissing the impact and persistence of these emerging factors in explaining the current state of reinsurance price to book valuations, may prove wishful thinking. Of course future book premiums may be in the offing, but these new headwinds certainly won't facilitate that scenario. Alternative access will most likely keep a tight lid on book values for short tail predominated businesses, while the uncertainty in the meaning of reinsurance book value will weigh heavily on valuations.
Of course there are actions Reinsurers can undertake, given the current valuation and interest rates environment. Reinsurers capital structure can be adjusted by swapping equity for debt on the balance sheets. Accretive buybacks of equity and access to cheap financing make for a compelling argument.
Regardless of the course of action existing Reinsurers take, new entrants will find capital formation difficult in an environment where sub book investment alternatives persist. In turn, alternatives will continue to gain traction. Paradoxically, discounted book itself may help facilitate a further adoption of alternative structures at the cost of traditional company capital formation, thereby reinforcing the persistence of discounted book.
September 15, 2010
Japan Inc. vs the Speculators
Here we have a classic matchup.
A Sovereign bank vs market speculators. If you recall the classic match up of the early 1990's (Market led by George Soros vs Bank of England)
The UK's prime minister and cabinet members tried vehemently to prop up a sinking pound and withdrawal from the monetary system the country had joined two years prior was the last resort. Prime Minister Major raised interest rates from 10 to 12 percent, then to 15, and he authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets however the measures failed to prevent the pound falling lower than its minimum level in the ERM.
The Treasury took the decision to defend Sterling's position, believing that to devalue would be to promote inflation.[5] On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.
the Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after they were unable to keep sterling above its agreed lower limit. George Soros, the most high profile of the currency market investors, made over US$1 billion profit by short selling sterling.Source Wikipedia
By contrast, Todays matchup is altogether different. Speculators are buying Yen as a safe haven currency as they regard the BOJ's lack of will to print yen, and it's position as the second largest investable economy (China is not there yet) as the only credible safe haven from dollar and euro risks. So there is no end game, just a parking spot.
Given Japan's deflationary domestic economy and it's fundamental need to export to survive, BOJ should be printing with reckless abandon. Building up foreign reserves would not be inflationary, and it would give Japan some global clout to defend against an economic collapse of it's own.
Unlike, Black Wednesday, the speculators have no capitulation trigger to press on.
Additionally, the is nothing to stop Japan's MOF from printing ad nauseam.
Sempre Fiat!
A Sovereign bank vs market speculators. If you recall the classic match up of the early 1990's (Market led by George Soros vs Bank of England)
The UK's prime minister and cabinet members tried vehemently to prop up a sinking pound and withdrawal from the monetary system the country had joined two years prior was the last resort. Prime Minister Major raised interest rates from 10 to 12 percent, then to 15, and he authorised the spending of billions of pounds to buy up the sterling being frantically sold on the currency markets however the measures failed to prevent the pound falling lower than its minimum level in the ERM.
The Treasury took the decision to defend Sterling's position, believing that to devalue would be to promote inflation.[5] On 16 September the British government announced a rise in the base interest rate from an already high 10 to 12 percent in order to tempt speculators to buy pounds. Despite this and a promise later the same day to raise base rates again to 15 percent, dealers kept selling pounds, convinced that the government would not stick with its promise. By 19:00 that evening, Norman Lamont, then Chancellor, announced Britain would leave the ERM and rates would remain at the new level of 12 percent (however, on the next day interest rate was back on 10%). It was later revealed that the decision to withdraw had been agreed at an emergency meeting during the day between Norman Lamont, Prime Minister John Major, Foreign Secretary Douglas Hurd, President of the Board of Trade Michael Heseltine and Home Secretary Kenneth Clarke (the latter three all being strong pro-Europeans as well as senior Cabinet Ministers), and that the interest rate hike to 15 percent had only been a temporary measure to prevent a rout in the pound that afternoon.
the Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism (ERM) after they were unable to keep sterling above its agreed lower limit. George Soros, the most high profile of the currency market investors, made over US$1 billion profit by short selling sterling.Source Wikipedia
By contrast, Todays matchup is altogether different. Speculators are buying Yen as a safe haven currency as they regard the BOJ's lack of will to print yen, and it's position as the second largest investable economy (China is not there yet) as the only credible safe haven from dollar and euro risks. So there is no end game, just a parking spot.
Given Japan's deflationary domestic economy and it's fundamental need to export to survive, BOJ should be printing with reckless abandon. Building up foreign reserves would not be inflationary, and it would give Japan some global clout to defend against an economic collapse of it's own.
Unlike, Black Wednesday, the speculators have no capitulation trigger to press on.
Additionally, the is nothing to stop Japan's MOF from printing ad nauseam.
Sempre Fiat!
August 18, 2010
July 23, 2010
July 22, 2010
Japan Revisited
Japan has painted itself into the mother of all corners. Well not exactly. More accurately, the market has painted Japan into the mother of all corners, and Japanese policy makers let them.
At this juncture, Japan needs to address the stranglehold that the yens relative value has on the Japanese economy. Japan needs to turn on the printing press and start using its fiat currency to buy real assets.Using debt to spur domestic growth is already a proven failure. At this juncture, any government debt for asset swap would be accretive.
While Japanese debt is largely held in domestic hands, Japan needs to shore up its balance sheet now. Waiting until they need to tap global lenders will prove their undoing. Printing and buying assets now, will give them something to sell when they really need to defend their currency.
At this juncture, Japan needs to address the stranglehold that the yens relative value has on the Japanese economy. Japan needs to turn on the printing press and start using its fiat currency to buy real assets.Using debt to spur domestic growth is already a proven failure. At this juncture, any government debt for asset swap would be accretive.
While Japanese debt is largely held in domestic hands, Japan needs to shore up its balance sheet now. Waiting until they need to tap global lenders will prove their undoing. Printing and buying assets now, will give them something to sell when they really need to defend their currency.
July 20, 2010
May 7, 2010
Orion Investment Managment Interview in Bottom Line
Roger Crombie interviews our firm.
Orion Interview - Bottom Line Magazine, Roger Crombie May-June 2010
Orion Interview - Bottom Line Magazine, Roger Crombie May-June 2010
April 14, 2010
An Alternative View on Asset Allocation
This paper addresses the an alternative to the Standard MV optimal portfolio construction used in asset allocation. Comments are welcome
A Systematic Alternative Asset Allocation Methodology
A Systematic Alternative Asset Allocation Methodology
January 14, 2010
Risk Based Compensation Featured at AllAboutAlpha
I am pleased to report that the financial website All About Alpha is featuring A framework for Risk Based Compensation today.
Many thanks to editor Chris Holt and the folks at All About Alpha for their thoughtful consideration.
Many thanks to editor Chris Holt and the folks at All About Alpha for their thoughtful consideration.
January 8, 2010
Finding Portable Alpha in Fixed Income
My colleagues and I have been doing some interesting work in developing non-credit based fixed income overlays.
By way of introduction, portable alpha received lots of negative press in 2008. The primary reason for this was the after -the -fact discovery that many of the alphas being ported were, in fact, betas. These betas were wrongly characterized alphas as a result of measurement against inappropriate benchmarks. And although many of these betas were uncorrelated to the portfolios they were being ported on to, the liquidity meltdown of 2008 drove correlations of seemingly independent betas to 1. This conditional correlation had the end result of leaving allocated portfolios with leveraged beta exposure, probably the last thing managers needed to tell their investment committees at that time.
We set out generate a strategy that reduced the Barclay's Intermediate Term Bond Index's overall volatility while increasing total return. Additionally, our goal was to do this without adding corporate credit risk.
To achieve a meaningful result, strategy generation must be robust with respect to survivor bias, rule generation, and implementation. All elements of any strategy must be formulated out of sample and all rules must be achievable in practice. Additionally, we propose a different way of looking at the portable alpha problem. Our main concern is the overlay's utility as a condition risk mitigation tool. Rather than simply juicing the strategy with normally uncorrelated returns, we seek to mitigate benchmark loss and improve the overall risk profile of the investment. We believe that this results in a better definition of alpha for our purposes.
To achieve a meaningful result, strategy generation must be robust with respect to survivor bias, rule generation, and implementation. All elements of any strategy must be formulated out of sample and all rules must be achievable in practice. Additionally, we propose a different way of looking at the portable alpha problem. Our main concern is the overlay's utility as a condition risk mitigation tool. Rather than simply juicing the strategy with normally uncorrelated returns, we seek to mitigate benchmark loss and improve the overall risk profile of the investment. We believe that this results in a better definition of alpha for our purposes.
The resultant strategy (abbreviated AO), partitions the yield curve into multiple maturity sectors and runs multiple behavioral models in each. The models have zero correlation between them and thus extract quite different patterns from the market. Holding periods range from about 5 weeks down to well under 1 week. With no overlap, the models find opportunities in all market conditions.
For purposes of risk analysis, we have highlighted two exogenous event types that both asset and liability driven investors should find of particular interest. Months in which significant Capital Markets dislocations occurred are highlighted in yellow. Months in which significant Insurance Loss events occurred are highlighted in red. We labeled 9/11 orange as it represents both. Event details and statistics are noted below.
The following table illustrates AO’s monthly returns to Capital Market dislocations. The conditional returns are strongly positive and statistically significant, whilst remaining unaffected by large Insurance Loss events.
*All returns are Net of Managment and Performance Fees. All returns net of financing and transaction fees
On a monthly basis, the AO overlay outperformed the benchmark only return 92% of the time, added no benefit 6% of time, and underperformed 2% of the time. There was no serial auto-correlation to the under performance.
Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | TOT | |
1997 | 0.03% | 1.18% | 0.21% | 0.44% | 0.25% | 0.97% | 0.44% | 0.38% | 0.02% | 0.46% | -0.01% | 4.38% | |
1998 | 0.32% | 0.62% | -0.07% | 0.02% | 0.62% | 0.76% | 0.43% | 0.71% | 1.46% | 1.36% | 0.32% | 0.34% | 6.90% |
1999 | 0.78% | 0.56% | -0.53% | 0.48% | 1.24% | 0.49% | 0.05% | 0.27% | 0.24% | -0.18% | -0.19% | 0.66% | 3.86% |
2000 | 0.91% | -0.21% | 1.16% | -0.20% | -0.20% | 0.38% | 0.40% | 0.66% | 0.54% | 0.21% | 0.53% | 1.29% | 5.45% |
2001 | 1.49% | 0.95% | 1.01% | 0.43% | 0.51% | 0.32% | 0.14% | 1.13% | 1.36% | 1.20% | -1.92% | 1.10% | 7.73% |
2002 | -0.28% | 0.66% | 0.87% | -0.36% | -0.17% | -0.04% | 2.25% | 0.43% | 0.49% | -0.13% | 0.05% | -0.13% | 3.65% |
2003 | -0.24% | 0.52% | -0.74% | -0.18% | 0.21% | 0.84% | 2.89% | 0.55% | 0.32% | 0.19% | -0.54% | 0.46% | 4.28% |
2004 | -0.18% | 0.37% | -0.73% | 1.23% | 0.23% | 0.95% | 0.73% | 0.37% | -0.31% | -0.60% | 0.19% | 0.06% | 2.31% |
2005 | 0.40% | 0.83% | 0.20% | 1.02% | 0.26% | 0.24% | 0.37% | 0.08% | -0.11% | 0.96% | -0.24% | 0.77% | 4.76% |
2006 | -0.06% | 0.22% | -0.22% | 0.96% | 0.32% | -0.23% | 0.41% | 0.58% | 0.64% | 0.26% | 0.75% | 0.64% | 4.28% |
2007 | 0.26% | 0.93% | 0.58% | 0.05% | 0.33% | 0.18% | 0.54% | 0.38% | 0.33% | -0.03% | 1.78% | 0.59% | 5.92% |
2008 | 1.15% | 0.24% | 0.92% | 0.03% | 1.20% | 1.19% | -0.29% | 0.05% | 1.25% | 0.33% | 2.88% | 1.86% | 10.82% |
2009 | 1.25% | 0.63% | 0.69% | 0.07% | 0.24% | 0.12% | -0.01% | -0.46% | 0.04% | -0.09% | -0.52% | -0.15% | 1.81% |
*All returns are Net of Fees | |||||||||||||
*All returns are Net of Managment and Performance Fees. All returns net of financing and transaction fees
The following tables illustrate AO's non-correlated returns to the Barclays Aggregate and Government bond benchmarks while significantly outperforming during Stressful Market Events.
Capital Markets Events All Returns are Gross for Purposes of Comparison | ||||
Date | AO Return | 2YR Gov Index* | Intermediate Agg. ** | |
Russian Financial Crisis / LTCM | Sep-98 | 1.46% | 0.38% | 0.41% |
Dot Com Bubble Burst | Jan-01 | 1.49% | 1.18% | 1.61% |
9/11 Terrorist Attacks | Sep-01 | 1.36% | 2.07% | 1.50% |
Enron Bankruptcy | Nov-01 | 1.10% | -0.48% | -0.48% |
US ISM Survey Tightening Fears | Mar-02 | 0.87% | -1.53% | -1.33% |
WorldCom Bankruptcy | Jul-02 | 2.25% | 2.00% | 1.20% |
Rate Hike Fears | Jul-03 | 2.89% | -2.19% | -2.41% |
Fed Rate Tightening Fears | Apr-04 | 1.23% | -2.26% | -2.15% |
Bear Sterns Collapse | Mar-08 | 0.92% | 0.65% | 0.39% |
Lehman Bankruptcy | Sep-08 | 1.25% | 0.67% | -0.97% |
Bank Liquidity Fears | Oct-08 | 0.33% | 0.67% | -1.79% |
Event Risk Summary All Returns are Gross for Purposes of Comparison | |||
Average Returns for | AO | 2YR Gov Index* | Intermediate Agg** |
Capital Markets Events | 1.37% | 0.10% | -0.37% |
All Other Months | 0.35% | 0.49% | 0.56% |
The AO active management of Government Securities creates a risk and return benefit that cannot be reproduced by adding a passive Treasury Benchmark, as evidenced by the correlation comparison below.
Correlations Comparison | |||
AO | 2YR Gov Bond Index* | ||
To 2YR Gov Index* | To Barclays Intermediate** | To Barclays Intermediate** | |
For Capital Markets Events | -12.63% | 5.18% | 86.68% |
For Non Event Months | 32.95% | 30.40% | 88.36% |
* 2 Year Barclays Govt Bond Index **Benchmark is the Barclays U.S. Aggregate Bond Total Return Index (BBG Code LC08TRUU) Note: For analysis Sep-01 data removed from insurance correlation as it is in Capital Markets Correlation Data. Francis and Charlie data used once in correlation | |||
The following tables highlight AO's utility.
An overlay would have added value to the Barclays Intermediate Bond Index bench mark in every year since 1997, regardless of Interest Rate environment, or market conditions. On a monthly basis, the AO overlay outperformed the benchmark only return 92% of the time, added no benefit 6% of time, and underperformed 2% of the time. There was no serial auto-correlation to the under performance.
AO 130/30 (AP) vs. Barclays Intermediate 1997 – 2009 (all Returns in percent) | Added | AP vs. Index | |||||||||||||||
AP | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | Annual Net | Value In % | Count | Monthly Win Loss | |
1997 | AP | 0.00 | 0.25 | -0.44 | 1.39 | 1.01 | 1.08 | 2.25 | -0.28 | 1.31 | 1.11 | 0.39 | 0.84 | 8.82 | 1.15 | 9 | Outperforms |
Barclays | 0.00 | 0.24 | -0.78 | 1.33 | 0.88 | 1.01 | 1.97 | -0.40 | 1.20 | 1.11 | 0.26 | 0.84 | 7.67 | 0 | Underperforms | ||
1998 | AP | 1.28 | 0.21 | 0.34 | 0.53 | 0.89 | 0.80 | 0.54 | 1.52 | 2.41 | 0.27 | 0.29 | 0.51 | 9.40 | 1.79 | 10 | Outperforms |
Barclays | 1.19 | 0.03 | 0.36 | 0.53 | 0.71 | 0.58 | 0.41 | 1.31 | 1.99 | -0.12 | 0.20 | 0.41 | 7.60 | 1 | Underperforms | ||
1999 | AP | 0.84 | -0.88 | 0.56 | 0.51 | -0.33 | 0.04 | -0.34 | 0.12 | 1.31 | 0.34 | 0.05 | -0.11 | 2.01 | 1.01 | 9 | Outperforms |
Barclays | 0.62 | -1.04 | 0.72 | 0.37 | -0.68 | -0.10 | -0.36 | 0.04 | 1.24 | 0.39 | 0.10 | -0.30 | 1.00 | 3 | Underperforms | ||
2000 | AP | -0.32 | 0.90 | 1.40 | -0.15 | 0.04 | 2.05 | 0.83 | 1.52 | 1.13 | 0.64 | 1.58 | 2.13 | 11.60 | 1.42 | 9 | Outperforms |
Barclays | -0.58 | 0.96 | 1.07 | -0.10 | 0.10 | 1.94 | 0.71 | 1.33 | 0.97 | 0.58 | 1.43 | 1.76 | 10.18 | 3 | Underperforms | ||
2001 | AP | 2.04 | 1.06 | 0.97 | 0.04 | 0.75 | 0.39 | 2.00 | 1.29 | 1.89 | 1.89 | -1.54 | -0.17 | 10.40 | 2.01 | 11 | Outperforms |
Barclays | 1.61 | 0.79 | 0.67 | -0.08 | 0.60 | 0.30 | 1.96 | 0.97 | 1.50 | 1.54 | -0.99 | -0.48 | 8.39 | 1 | Underperforms | ||
2002 | AP | 0.63 | 1.15 | -1.08 | 1.69 | 0.83 | 0.86 | 1.84 | 1.32 | 1.48 | -0.10 | -0.10 | 1.68 | 10.10 | 0.95 | 6 | Outperforms |
Barclays | 0.71 | 0.96 | -1.33 | 1.79 | 0.88 | 0.88 | 1.20 | 1.20 | 1.34 | -0.06 | -0.12 | 1.71 | 9.14 | 6 | Underperforms | ||
2003 | AP | 0.03 | 1.26 | -0.15 | 0.57 | 1.30 | 0.26 | -1.58 | 0.59 | 2.30 | -0.64 | 0.01 | 1.09 | 4.94 | 1.12 | 8 | Outperforms |
Barclays | 0.10 | 1.11 | 0.06 | 0.62 | 1.24 | 0.02 | -2.41 | 0.43 | 2.21 | -0.70 | 0.17 | 0.96 | 3.82 | 4 | Underperforms | ||
2004 | AP | 0.60 | 1.06 | 0.44 | -1.79 | -0.28 | 0.80 | 1.08 | 1.74 | 0.08 | 0.56 | -0.59 | 0.71 | 4.34 | 0.61 | 8 | Outperforms |
Barclays | 0.65 | 0.95 | 0.65 | -2.15 | -0.35 | 0.53 | 0.87 | 1.64 | 0.17 | 0.73 | -0.64 | 0.69 | 3.73 | 4 | Underperforms | ||
2005 | AP | 0.46 | -0.28 | -0.33 | 1.43 | 0.93 | 0.47 | -0.61 | 1.09 | -0.77 | -0.34 | 0.32 | 1.00 | 3.26 | 1.24 | 10 | Outperforms |
Barclays | 0.34 | -0.52 | -0.38 | 1.14 | 0.86 | 0.40 | -0.71 | 1.07 | -0.74 | -0.61 | 0.39 | 0.78 | 2.02 | 2 | Underperforms | ||
2006 | AP | 0.11 | 0.30 | -0.67 | 0.31 | 0.01 | 0.10 | 1.38 | 1.51 | 0.95 | 0.69 | 1.24 | -0.18 | 5.62 | 1.12 | 9 | Outperforms |
Barclays | 0.12 | 0.23 | -0.61 | 0.04 | -0.08 | 0.17 | 1.26 | 1.35 | 0.76 | 0.61 | 1.02 | -0.37 | 4.51 | 3 | Underperforms | ||
2007 | AP | 0.10 | 1.60 | 0.37 | 0.49 | -0.54 | -0.14 | 0.95 | 1.29 | 0.86 | 0.80 | 2.25 | 0.49 | 8.37 | 1.54 | 11 | Outperforms |
Barclays | 0.03 | 1.33 | 0.21 | 0.48 | -0.63 | -0.19 | 0.79 | 1.18 | 0.76 | 0.81 | 1.74 | 0.32 | 6.83 | 1 | Underperforms | ||
2008 | AP | 2.09 | 0.26 | 0.65 | -0.22 | -0.24 | 0.19 | -0.08 | 0.86 | -0.61 | -1.69 | 3.38 | 3.38 | 7.66 | 2.80 | 11 | Outperforms |
Barclays | 1.76 | 0.19 | 0.39 | -0.23 | -0.58 | -0.15 | 0.00 | 0.85 | -0.97 | -1.79 | 2.55 | 2.84 | 4.86 | 1 | Underperforms | ||
2009 | AP | 0.14 | -0.03 | 1.54 | 0.67 | 0.76 | 0.36 | 1.37 | 0.79 | 0.90 | 0.61 | 1.13 | -1.41 | 6.64 | 0.32 | 7 | Outperforms |
Barclays | -0.22 | -0.21 | 1.35 | 0.65 | 0.69 | 0.33 | 1.37 | 0.92 | 0.89 | 0.63 | 1.28 | -1.37 | 6.31 | 4 | Underperforms | ||
* All AP Returns are Net of Fees. | |||||||||||||||||
AO130/30 Overlay vs. Barclays Intermediate Aggregate Bond Index 1997-2009
KEY STATISTICS | Barclays Inter. Agg* | AO Net of Repo** | 130/30 Overlay | AO Real Money*** |
Annualized Avg. Return | 5.88% | 5.12% | 7.41% | 7.25% |
Annualized Std. Dev. | 2.98% | 2.18% | 2.97% | 2.90% |
Information Ratio | 1.97 | 2.35 | 2.39 | 2.50% |
*Barclays Intermediate Aggregate Index includes Repo Return **AO Real Money defined as AO with no Net Borrowing | ||||
The key driver to the attractiveness of AO as an overlay candidate is the strategy's low conditional correlation to exogenous events that tend to drive lowly correlated betas to high correlation. From an allocators prospective, these periods are precisely the times when low correlations need to occur.
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