Is long vol a better risk asset hedge than a 60/40 traditional asset allocation? Question posed by @Ksidiii and one we touched on in earlier convo. A thread on my opinions. 1/x
First, 60/40 (which I'm using as shorthand for a bond allocation; the exact % may vary) has a long history, and works very effectively when equities and rates have positive expected returns and when their correlation is <1 or better yet negative. 2/x
Second, long vol positions as an allocation have a shorter-but-still-long history of delivering significant boosts to long run returns when tail events occur--e.g., Mar 2020, Sep 2008, etc. 3/x
The theory is clear, and there have been *a few* great investment managers with small, managed long vol exposures that have delivered tremendous boosts to long run portfolio performance by generating $$$ when equities tanked, and allowing investors to BTD, basically. 4/x
The primary difference in a portfolio allocation to FI vs. long vol is that FI is positive carry, while long vol is negative carry. You get paid to own bonds, and you pay to buy insurance. Bonds usually pay off, and insurance covers tail risk. 5/x
Some good FI managers outperform, and so the positive carry is great. Some good vol managers outperform, and so the negative carry isn't as painful. Both of those give a little edge to long run portfolio returns. 6/x
I believe we as an investing culture should evaluate strategy by some generic benchmark for each asset class, and tactics by success of an investor or manager against the benchmark of each asset class. Blah blah blah b/c of portable alpha and TRS. 7/x
In that light, whether FI is "better" for portfolios than long vol depends on return of some generic bench for inclusion in portfolios for each, not about whether a manager is a "good" manager in either strategy. 8/x
In that light, and b/c must evaluate strategic allocation based on passives, positive carry FI beats out passive negative carry long vol every time...because of carry. 9/x
BUT that shouldn't preclude TACTICAL long vol positions when market conditions make that a reasonable r/r in the short term. 10/x
Maybe now is such a time, b/c expected returns in rates are relatively low and long vol is relatively cheap, but that's not an ALLOCATION decision, it's a TACTICAL one. And that's what I'm cooking tonight. 11/11 fin.
PS: This is probably the sort of opinion that deserves an academic paper with a lot more supporting evidence and historical returns, but I'll leave that to someone more patient than I.

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More from @lebas_janney

22 May
@coloradotravis @choffstein “Backed by” isn’t quite the right term here. USDT takes in USD and then issues an equivalent amount of USDT crypto. The co, assuming not 100% of its USD will be withdrawn in a single day then goes and invests the USD in income generating assets. 1/
@coloradotravis @choffstein The risk then is that the USDT co (a) looses $ on its investments such as CP and has insufficient $ to pay back withdraws or (b) faces a liquidity mismatch in which it can’t redeem enough investments to cover withdraws. 2/
@coloradotravis @choffstein In that respect, it’s not much different from a bank or prime money mkt fund) and even more like a mid-2000s SIV! Remember those?). The major difference being there’s no regulation or transparency into asset quality and liquidity. 3/
Read 6 tweets
19 Mar
Context: ~12m ago, bank balance sheets were overloaded with USTs, and banks were capital constrained. Fed loosened Supplementary Leverage Ratio (SLR) to help offer greater capital.

It was a big help! 1/x
The loosening was subtle at the time and basically exempted USTs held at holdco level from one of three major capital regs for big banks (the others being TCE and GSIB scoring). It freed up banks to use the capital held against USTs for lending activities. 2/x
12m later, most UST portfolios are held at bank opco and pd subs, and the big banks elected NOT for the most part to apply SLR loosening at the opco level, b/c doing so came with dividend restrictions. 3/x
Read 5 tweets
17 Mar
Your live tweet #FOMC presser, complete with guest appearances from the Simpsons starts here.
Powell starts with a victory lap.
Underlying Fed message:
Read 29 tweets
3 Mar
Fed Chair JayPow is scheduled to speak in a live Q&A with @WSJ tomorrow a bit after noon eastern. Here are the options. 1/x
First, it's helpful to keep in mind core Fed doctrine:
"never do more than absolutely necessary" (my words). Is anything necessary? Well, financial conditions did deteriorate *slightly* with the long end selloff, and there is evidence of UST dysfunction from time to time. 2/x
In evaluating JayPow's actions, what's the least absolutely necessary? He could just keep reinforcing the party line and ignore that higher long end rates caused financial conditions to rise marginally (it really is a small move). That's also a bit risky. 3/x
Read 8 tweets
3 Nov 20
What's at stake today for bond markets (brief thread):

1/x
First, I am not advocating for a candidate or party, just laying out what I would expect across several scenarios. Second, I do not have a more informed opinion of the outcome beyond what the polls say. My probabilities are all directly from or imputed from @NateSilver538

2/x
Most likely: Biden + Narrow D Senate (72%)

Key mkt policies: ~$2.5tln stimulus + $750bln infrastructure package

Rates: Steeper curve as Fed hike expect increase in '22 - '23. 5yr yields rise; 10yr 1% by year end

Risk: ST strong positive for risk

3/x
Read 8 tweets
11 May 20
I've spent a lot of time throwing rocks lately, so I'm going to try and be a little constructive and talk about negative interest rates.

The #NIRPening, a thread. 1/x
A central bank may seek to set o/n rates below zero, a new post-GFC approach.

Sweden's @riksbanken did in 2009
Denmark's @nationalbanken did in 2012
Europe's @ecb did in 2014, most famously 2/x
The basic pro-argument is that #NIRP alters the tradeoff btw consumption and savings sharply in favor of the former AND encourages cheap borrowing and investment. 3/x
Read 15 tweets

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