Monday, June 27, 2016

Back in the Saddle

What an historic time to return from my annual client visits!  There have been two big, game-changing events in the news and one big event for research geeks who have special interest in “Factors.”

The first is what’s on everyone’s mind and in all headlines - “BREXIT”. There may not be much more to say at this juncture regarding the announcement and vote that hasn’t already been said as my inbox is flooded with “Special” webinars, conference calls, etc explaining what this means for the markets, economy and the World in general.  One thing to keep in mind is that the vote was a vote for the people’s will, it’s not a binding political vote and there is already a petition for a second vote.  This is not going away anytime soon, SO STAY TUNED  we will have plenty to discuss on its potential impact as it further unfolds!

I am most interested in the currency markets though, a lot of market turmoil has started with issues first played out there.  Over the past few years, all the currency talk has been around currency hedged equity products while the spot currency products have struggled to really break through.  These products provide a great way to keep an eye on the currency markets as all the major currencies (along with some baskets) are in the ETP wrapper.  A quick glance at the ETFG Scanner shows 35 products that will give you direct exposures to currencies.  The CurrencyShares British Pound Sterling (FXB) was down over 8% on over 28x the average volume after the news on Friday an the CurrencyShares Japenesse Yen (FXY) was up over 3% on only 1.5x normal volume.

The other big event was IEX receiving approval to become an exchange.  IEX is currently an Alternative Trading System (“ATS”) which means that it’s a non-exchange venue that matches buyer and sellers.  Based off of the most recent numbers, it is the 3rd largest ATS in number of trades executed. IEX has been synonymous with a feature of the venue that is referred to as a “Speed Bump” which basically slows down orders by 350 millionths of a second.  This is controversial mainly because it goes against the practice of trying to execute a trade immediately, at the best available price, even if that means sending it to a rival market. It will be interesting to see what, if anything happens with competing exchanges.

On to the final news item which will not get the news coverage like “BREXIT” or IEX, but to research geeks like us its the stuff that we love.  It’s important to note that “Factor” based products are one of the fastest growing segments of the ETP market, so this should be on everyone’s radar who uses or thinks they may use a Factor product.  It was the latest piece by Cliff Asness of AQR in what amounts to a sparring match with Rob Arnott of Research Affiliates.  The two heavyweights in Factor investing have been publicly, mainly through research papers, boxing on two related issues of are “Factors” overvalued/expensive and potentially overcrowded, and is it possible to time them.  I’m skipping a bunch of details for the sake of keeping this short but Arnott, Beck, and Kalesnik (ABK) highlight that investing in “Expensive” factors reduces your future returns.  Asness argues that for higher turnover factors like Momentum, ABK’s model is not effective as it uses long time horizons and for factors like Value your essentially doubling up on your value exposure by using ABK’s process.  If you want to know more about this and don’t want to read the papers (though they are not long reads), please feel free to reach out to us.

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