The Center for Financial Services this week welcomes Sheila Bair as our Fellow-In-Residence from May 1st through May 3rd.

By Mark Shore

This paper reviews the performance metrics and use of alternative asset allocations within a traditional asset portfolio. We show most asset classes are not Gaussian (bell-shaped)normal curves as modern portfolio theory assumes returns to be. Instead, the returns are asymmetrical to the right or left causing the employment of higher statistical moments such as skewness and kurtosis to determine risk-adjusted returns. Therefore, the first  and second statistical moments (mean and variance) are not sufficient to determine risk-adjusted returns of a portfolio. Utilizing higher moments in conjunction with volatility parsed between upside and downside returns, we demonstrate how managed futures and hedge funds perform individually and simultaneously as diversifiers in a traditional portfolio. 

You can read the full paper on Mark Shore’s own Shore Capital Management site: 

• http://www.shorecapmgmt.com/skewing-your-diversification.html

April 17, 2013
By Karim Pakravan

The IMF Report Card: High Hopes, Bumpiness and Divergence

The International Monetary Fund (IMF, the global financial watchdog) mixes praise and blame in its just-released semi-annual World Economic Outlook report (WEO, April 2013).

The global recovery from the 2008-2009 recession is sluggish at best. Moreover, with Europe slipping in a second year of recession in 2013, regional economic divergences are being exacerbated. The “three-speed” 2013 recovery is characterized by an acceleration of Emerging Markets (EM) economic growth, a sluggish pace in the United States and a contraction across the eurozone (with the exception of Germany, which could eke out a 1% output expansion this year). At the same time, Japan has shifted economic policy under its new Prime Minister Abe, and “Abenomics” has translated into the promise of a major program of quantitative easing and structural reforms, which should lead to sharply higher growth in 2013.  Overall, while the IMF states that “global economic prospects have improved once again”, it has downgraded its global growth forecast by 0.2% to 3.3% (marginally better than the 3.1% achieved in 2012). The IMF also projects that global economic growth will accelerate to 4.0% in 2014 (on the basis that things always look better in the future, at least in IMF WEO reports!).

While the aggregate fiscal deficits of the advanced countries have been cut by half since the peak of the recession in 2009, the IMF is concerned about too much austerity.  In particular, it chastises the US for too much fiscal tightening, too soon—according to the WEO, tax increases and the ‘sequester’ will represent a fiscal consolidation equal to 1.8% of GDP in 2013.  The global financial institution also recommends that for both the US and the eurozone, fiscal conditions should continue at a pace compatible with continued recovery. In order words, the message is one of easing up on the fiscal brakes in the short term.  At the same time, the IMF criticizes the US and Japan for not presenting credible plans to achieve greater medium-term fiscal consolidations. Furthermore, the IMF recognized the need to keep the major economies’ monetary policies extremely accommodative , at least for the near future. 

The IMF report also lists a number of familiar risks in the short and long term. In particular it cites the distortions posed by the non-conventional monetary policies of the major central bank, as well as the equally complex risks  posed by the eventual unwinding of these policies.

Altogether, the IMF evenly distribute praise and blame in a report which is consistent with its overall policy stance of the past two years: focus on growth in the short term and fiscal consolidation in the longer term, and watch for those pesky policy, political, market and financial risks.