Author Archives: Scalper1

Is It Time For Smart-Beta ETFs To Enter The Bond Markets?

By Detlef Glow The new year has started, but the financial markets are still affected by topics from the old year. One of the topics that has come up again is the liquidity of bonds in general-and bond funds in particular. From my point of view nearly all that can be said has been said about this topic. After all this discussion about liquidity in the bond markets and the possible implications for bond funds, especially exchange-traded funds (ETFs), one might raise the question of whether these issues could be addressed with smart-beta products. These products concentrate on the liquidity of securities in addition to using the two main drivers of performance-duration and credit risk. Since the liquidity of the underlying securities is already an issue for ETFs that track the broad indices, even “plain-vanilla” products are nowadays not far from being smart-beta products. That is because of the optimization techniques used to replicate the returns of the underlying index using the tradable securities in the index basket. In this regard a smart-beta strategy that employs the liquidity of the bonds would help to build liquid indices for all kinds of bond sectors, which could then easily be replicated by funds. In addition, a smart-beta approach could help investors overcome the major struggle of market-weighted bond indices: these indices give the highest weightings to issuers (companies, countries, etc.) with the highest outstanding debt in the respective investment universe. This approach can lead to high single-issuer risk within the portfolio, which is normally not the intention of an investor who buys into a broad market index. A smart-beta approach could limit the issuer risk by introducing a cap within the index methodology. From my point of view smart-beta ETFs could be the answer to the questions and concerns raised by investors around bond indices. Since investors tend to buy only products they understand, the index construction must be quite smart. At the same time it must be as simple as possible, so investors can easily understand the investment objective and the risk/return profile of the index and therefore of the ETF. That said, in my opinion it is time for smart beta to enter the bond markets. The views expressed are the views of the author, not necessarily those of Thomson Reuters.

Castlemaine Debuts 5 New Alternative Mutual Funds

Castlemaine Funds is looking to make a big splash in the liquid alts world in 2016 and beyond. Just less than three months after filing paperwork for its first quintet of alternative mutual funds , and clearly undeterred by some high profile fund closures , the firm simultaneously launched all five funds in the final week of December, just in time to ring in the New Year: New Firm, One Portfolio Manager and Five Funds Castlemaine LLC, the investment advisor to each fund, is based in New York City and was formed in 2015. The firm’s Chief Investment Officer and Chief Compliance Officer, Alfredo Viegas, is going to be a busy man. He is the sole portfolio manager for all five funds, each of which employs a different alternative investment strategy. Four of the five funds appear to be making direct investments in securities and building alternative investment portfolios, while the fifth (the Multi-Strategy Fund) invests in a collection of other funds. The Emerging Markets Opportunity Fund seeks high total returns with a secondary goal of generating investment income. Its investments include both long and short positions in equity and debt securities from issuers based in emerging-market countries or countries (such as Hong Kong and Singapore) with economies tied to emerging markets. Castlemaine’s Event Driven Fund pursues an objectives of capital appreciation by taking both long and short positions in equity securities, such as shares of stock and ETFs. The fund focuses on corporate events, such as mergers and bankruptcies, and combines its long/short equity positions with an options-trading strategy and up to 130% leverage. The Long/Short Fund also pursues an objectives of capital appreciation by taking both long and short positions in equity securities and ETFs. The fund invests in both U.S. and non-U.S. equities, and may also use up to 130% leverage, although it will generally fluctuate between 50% and 80% net-long exposure. The Castlemaine Market Neutral Fund invests in stocks, bonds, and options, with the primary and secondary objectives of total return and income generation, respectively. Its long and short positions are designed to cancel one another out on a net basis, providing “market neutral” exposure. And finally, the Castlemaine Multi-Strategy Fund operates as a “fund of funds” across a variety of alternative strategies, including those employed by both affiliated and unaffiliated funds. The fund uses Castlemaine’s “dynamic asset allocation” process in pursuit of optimal diversification and portfolio weightings that reflect prevailing market conditions. The Multi-Strategy Fund will allocate its assets to the following investment strategies: Long/Short Equity Event Driven Market Neutral Emerging Markets Long/Short Macro-Risk Parity Global Macro Unconstrained Bonds Managed Futures Convertible Arbitrage Capital Structure Arbitrage All five funds carry an investment management fee of 1.24%, and each is currently offered in a single share class. For more information, read the shared prospectus of all five funds . Jason Seagraves contributed to this article.

WisdomTree Launches Pair Of Long-Short Equity ETFs

Markets have become more correlated and more volatile, and this has led many investors to consider alternative investment strategies, such as long-short equity. Traditionally, hedge funds have been the most prominent practitioners of long-short equity strategies, but liquid alternatives have lower fees, greater transparency, less complicated tax-filing requirements, and greater liquidity than hedge funds, and thus have become increasing popular. Two Long-Short Equity ETFs WisdomTree (NASDAQ: WETF ), a leading sponsor of ETFs and other “ETPs” (exchange-traded products) recently launched a pair of alternative long/short equity funds: Both funds offer stock-selection strategies designed to add alpha within a core stock portfolio. The principal difference between the two funds is that DYLS is designed to hedge against market drawdowns with a dynamic hedge on the market, while DYB is designed to provide “more bearish” net positioning. Both ETFs have net-expense ratios of 0.48%. “Data shows that blending a long/short index with traditional equity and bond allocations has improved risk-adjusted returns,” said Jeremy Schwartz, WisdomTree’s Director of Research, in a recent statement. “WisdomTree’s strategies challenge the traditional long/short and hedge fund community with systematic, liquid long/short index-based ETFs. DYLS and DYB are designed to generate alpha at the core through quantitative and fundamental stock selection – while also having the ability to hedge market risk dynamically.” Systematic Tracking of Indices DYLS tracks the WisdomTree Dynamic Long/Short U.S. Equity Index , which consists of long positions in approximately 100 U.S. large- and mid-cap stocks that meet eligibility requirements and have the best combined score based on fundamental growth and value signals, and short positions in the largest 500 U.S. companies. The long positions are weighted according to their volatility characteristics, while the short positions are weighted by market cap and designed to hedge against market risk. The long-portfolio will be 100% invested at all times, while the short portfolio will vary between 0% and 100% exposure based on “a quantitative rules-based market indicator that scores growth and value market signals.” DYB tracks the WisdomTree Dynamic Bearish U.S. Equity Index , which switches between long positions in the same stocks as DYLS and U.S. Treasurys. DYB’s short portfolio is the same as DYLS’s. The long equity portfolio can range from 0% to 100% while employing a “variable monthly hedge ratio” from 75% to 100% in the short portfolio. During times when the market indicator shows unattractive readings on valuation and growth characteristics, DYB can move to 100% exposure to U.S. Treasurys. Both funds launched on December 23, 2015. Jason Seagraves contributed to this article.