Outcome based investing for The Family Office

It’s summer 2018.

The good news is Trump’s selected tariffs have not escalated into a fully blown global trade war. The bad news is his combination of tax cuts & infrastructure spending amount to an almost unprecedented easing of fiscal policy. For a late cycle economy operating with sub 4% unemployment & increasing signs of faster wage growth, the additional policy stimulus has reawakened the bond vigilantes. Furthermore it has sparked the hawks at the Federal Reserve into action. Lead by new Chairman Jerome Powell the Fed are providing clear signals that the era of gradualism in monetary policy is over. Rate hikes will come faster & potentially continue for longer.

What is a family office investor focused on global equity markets to do?

Large macro funds will task their army of in-house analysts to research a trading solution. Big asset managers with their seemingly limitless research budgets will tap into the equally endless supply of research from the investment bank community.

The star analyst at bank X claims to have identified a number of stocks / sectors with strong balance sheets & above average pricing power. However, the top economist at bank Y is arguing that utilities, as bond proxies, are a short & the best risk-reward investment.

What is a family office investor focused on global equity markets to do?

The two issues raised – how to trade a macro theme, like rising interest rates & how to create a level playing field for research – have one common solution. Equity baskets. Not the equity baskets of old based on naïve one-dimensional correlations or discretionary assessment, but the next generation version. Powered by best-in-class algorithms, baskets that can empirically identify the single stocks most sensitive to a chosen macro theme.

Equity baskets offer a number of advantages for family office investors looking to capture a topical theme.

  • A basket can be custom mapped to reflect a chosen macro theme like higher rates.
  • Capture a theme by a number of macro factors. In this example, equities sensitive to higher yields, higher inflation expectations AND increased expectations of an end to Quantitative Easing. Distilling multiple macro factors into one basket results in a more efficient trading expression.
  • Equities often have a higher beta to the chosen macro theme than the underlying factor itself; for example a stock may move 10% for a 1% gain in oil.
  • Equity baskets tend to offer a better Sharpe ratio
  • Mandate – long only investors can’t short utilities to gain exposure to a rising yield environment; oil futures may be deemed ‘off index’ for some.

Quant Insight is a new independent research firm with a difference. Unlike all the subjective opinion-based research from various ‘talking heads’, Qi’s algorithms empirically presents the macro characteristics of asset prices. The models provide actionable ideas in a user-friendly way to help discretionary investors generate alpha across all asset classes. By combining different assets, Qi can also create portfolios with specific features – exactly those features an investor may want. This allows investors to focus on outcomes – outcome based investing has arrived.

Thus far, Qi has derived baskets of European equities which benefit / suffer from a stronger EURO currency; baskets of US & European equities that outperform / underperform during bouts of interest rate volatility; a basket that wants UK economic growth; a basket of pan-European stocks exposed to political turbulence in Italy.

(Cant see the chart? Contact us) Trading EUR fx through European Equities: Qi basket of stocks that benefit from a stronger EUR currency / Qi basket of stocks that suffer from a stronger EUR currency

 MiFID II has generally been perceived as driving the cost of written research down. That, however, has come at the expense of access to ‘thought leaders’ sky rocketing. Any environment where a product is seen as a loss leader cannot reflect well on the quality of that product. Has MiFID simply replaced too much written research with a smaller pool of ineffectual content? In a MiFID II world, family offices without the vast budgets available to others need to find access to innovative research.

To date, quantitative research has typically been the preserve of larger asset managers. Next generation equity baskets derived from leading quantitative techniques offer family offices an efficient, cost effective way to capture the new wave of smart beta products that for too long have been perceived as exclusively for the bigger funds. Large AUM should not be synonymous with a monopoly of sophisticated research & investment ideas.

Big data should be a force to democratize the world of investing. Intelligent equity baskets are a way to level the playing field.



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