Monday, 10 June 2019 11:37

Use Bond ETFs for Hedging

(New York)

With all of the volatility of the last months, bond ETFs are taking on a new life. As an asset class, bond ETFs have surged in popularity in recent years as a much easier and cheaper way of accessing bond market liquidity. Recently, bond ETFs have seen their role morph. Whereas they have often been seen as a safe haven from periods of volatility, they are now being used as a risk management tool, says the head of iShares U.S. Wealth Advisory Product Consulting at BlackRock.

FINSUM: So many of the newer bond ETFs are designed to thrive in volatile markets, not just provide a low volatility safe haven. This means they are more of a proactive than reactive product.

Published in Bonds: Total Market

(New York)

Are your clients (or you) investing overseas? This article, from the advisers section of the Wall Street Journal, and written by the head of intermediary sales at Wells Fargo Asset Management, says that all advisers need to speak to their clients about international stocks.  The piece says many will be hesitant because of a lack of familiarity, but that it is very important because most would receive benefit from investing internationally. One tactic the author encourages is to explain to clients how much exposure they already have to overseas companies by walking through the everyday products they use and know, many of which will be from international companies. Additionally, show them how exposed they are to their home market by showing that most of their assets and cash flow (home, job, and investments) are all tied to their own country, so they could receive benefit from diversifying into international holdings.

FINSUM: This piece discusses somewhat of an old topic, as most will already be doing this. However, the tips about how to speak to clients were somewhat interesting.

Source: Wall Street Journal

Published in Macro
Tuesday, 20 January 2015 00:00

Franc Fallout Exposes Flawed Risk Management

(New York)

This Economist article highlights how last week’s Swiss Franc fallout, which occurred after the Swiss National Bank unexpectedly unwound their peg to the Euro, shows that risk management practices in finance are still a long way from ideal. The incident, which sent the Franc soaring from 1.2 to the Euro to .85 to the Euro in a matter of minutes, wiped out numerous foreign exchange brokers, caused Citigroup to lose $150m, and collapsed a nearly $1 bn hedge fund called Everest Capital. After the incident, it came out that many funds were placing bets against the Franc with 20x leverage, meaning a 5% move would wipe out their whole investment—the Franc moved 41% on Thursday. The incident shows both the continued irresponsibility of investors, but perhaps more importantly, the flaws in the current industry standard VAR (Value at Risk) calculation. The approach is supposed to calculate how much value a given investment will lose if the market moves a certain amount. The issue is, the calculation has to rely on previous events and how much they moved markets, meaning it will never be able to adequately describe risk for unprecedented moves like Thursday’s Franc surge. FX markets almost never move more than 10% in a day, so 41% would have destroyed any VAR model, which explains the losses.

FINSUM: Despite the efforts of regulators to clean up the industry and make balance sheets more transparent, there is still no good methodology for quantifying risk. The irony of the situation is that the current methods are supposed to guard against a crisis, but the models used are designed in such a way that they could never see one coming.

Published in Corporate News

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