Of Falling Risks and Indexes
|May 1st, 2012 | Filed under: Commodities, Indexes, Risk management, Today's Post | By: cfaille||
The analytics company Axioma Inc. has released its Risk Review for the first quarter of 2012. The review, prepared by Axioma’s Senior Director, Applied Research, Melissa Brown, and Director, Applied Research, Scott Hamilton, describes the first quarter as one of strength for markets around the globe.
Separately, Axioma and NASDAQ OMX have together announced a new index family (the NASDAQ Axioma Equity-Commodity Index Series) that will help portfolio managers gain exposure to the spot prices of commodities through the equity markets. There are three indexes in this series: one centered on oil, one on gold, and the third on agricultural commodities.
At a recent breakfast in their Manhattan offices, Axioma executives explained the creation of new indexes with the analogy of an onion. An asset manager might have been quite contentedly earning alpha for his clients and fees for himself with a certain quantitative strategy – such as, perhaps, trading on the stock of companies that mine or market gold or that are otherwise sensitive to that commodity’s price. But any quantitative strategy is susceptible to being reduced to an index, and along with this, to transparency and routine. Once this happens, that “alpha” becomes “beta,” and the 2 + 20 fees are no longer available.
A manager in search of alpha will have to move beyond that strategy, peeling away that layer of the onion and going to a deeper, not-yet-indexable, strategy. No doubt both the metaphrand and the metaphier in this image have produced their share of tears.
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Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."