Impact of Zoom on FINRA Claimants
SLCG presents a new study on the impacts that Zoom and other virtual meeting platforms have on the process of FINRA hearings, citing evidence that the newly updated process has a negative effect on those who are claiming.
Craig McCann's NASAA 2015 Presentation, Investments Through Time
Investments Through Time: The Evolution of Investment Products and How They are Sold.
Modeling a Risk-Based Criterion for a Portfolio with Options
Published in the Journal of Risk, Vol. 16, No. 6.
The presence of options in a portfolio fundamentally alters the portfolio's risk and return profiles when compared to an all equity portfolio. In this paper, we advocate modeling a
risk-based criterion for optioned portfolio selection and rebalancing problems. The criterion
is inspired by Chicago Mercantile Exchange's risk-based margining system which sets the
collateralization requirements on margin accounts. The margin criterion computes the losses
expected at the portfolio level using expected stock price and volatility variations, and is
itself an optimization problem. Our contribution is to remodel the criterion as a quadratic
programming subproblem of the main portfolio optimization problem using option Greeks.
We also extend the margin subproblem to a continuous domain. The quadratic programming
problems thus designed can be solved numerically or in closed-form with high efficiency,
greatly facilitating the main portfolio selection problem. We present two extended practical
examples of the application of our approach to obtain optimal portfolios with options. These
examples include a study of liquidity effects (bid/ask spreads and limited order sizes) and sensitivity to changing market conditions. Our analysis shows that the approach advocated
here is more stable and more efficient than discrete approaches to portfolio selection.
Robust Portfolio Optimization with VaR Adjusted Sharpe Ratio
Published in the Journal of Asset Management, 14(5):293-305, 2013.
We propose a robust portfolio optimization approach based on Value-at-Risk (VaR) adjusted Sharpe ratios. Traditional Sharpe ratio estimates using a limited series of historical returns are subject to estimation errors. Portfolio optimization based on traditional Sharpe ratios ignores this uncertainty and, as a result, is not robust. In this paper, we propose a robust portfolio optimization model that selects the portfolio with the largest worse-case-scenario Sharpe ratio within a given confidence interval. We show that this framework is equivalent to maximizing the Sharpe ratio reduced by a quantity proportional to the standard deviation in the Sharpe
ratio estimator. We highlight the relationship between the VaR-adjusted Sharpe ratios and other modified Sharpe ratios proposed in the literature. In addition, we present both numerical and empirical results comparing optimal portfolios generated by the approach advocated here with those generated by both the traditional and the alternative optimization approaches.
Are VIX Futures ETPs Effective Hedges?
Published in The Journal of Index Investing, Winter 2012, Vol. 3, No. 3, pp. 35-48.
Exchange-traded products (ETPs) linked to futures contracts on the CBOE S&P 500 Volatility Index (VIX) have grown in volume and assets under management in recent years, in part because of their perceived potential to hedge against stock market losses.
In this paper we study whether VIX-related ETPs can effectively hedge a portfolio of stocks. We find that while the VIX increases when large stock market losses occur, ETPs which track short term VIX futures indices are not effective hedges for stock portfolios because of the negative roll yield accumulated by such futures-based ETPs. ETPs which track medium term VIX futures indices suffer less from negative roll yield and thus appear somewhat better hedges for stock portfolios. Our findings cast doubt on the potential diversification benefit from holding ETPs linked to VIX futures contracts.
We also study the effectiveness of VIX ETPs in hedging Leveraged ETFs (LETFs) in which rebalancing effects lead to significant losses for buy-and-hold investors during periods of high volatility. We find that VIX futures ETPs are usually not effective hedges for LETFs.
Optimizing Portfolio Liquidation Under Risk-Based Margin Requirements
Published in the Journal of Finance and Investment Analysis, 2(1): 121-153, 2013.
This paper addresses a situation wherein a retail investor must liquidate positions in her portfolio -- consisting of assets and European options on those assets -- to meet a margin call and wishes to do so with the least disruption to her portfolio. We address the problem by first generalizing the usual risk-based haircuts methodology of determining the portfolio margin requirement given the current positions of a portfolio. We derive first and second-order analytic estimates for the margin requirements given the positions. Given this generalization, we determine the liquidation strategy that minimizes the total positions liquidated and meets the margin requirement. We implement the strategy on example portfolios and show advantages over traditional piece-wise liquidation approaches. The analytic approach outlined here is more general than the margin context discussed. Our approach is applicable whenever an investor is attempting to maximize the impact of their capital subject to leverage limits and so has obviously applications to the hedge fund industry.
Valuing Partial Interests in Trusts
The financial interests of a trust's beneficiaries are often diametrically opposed and conflict among trust beneficiaries is common. Although applicable law requires that trustees adhere to lofty standards of 'good faith' and 'fair dealing' they must make tangible, specific decisions, and sometimes under circumstances in which the settlor's expectations regarding investments and distributions as set forth in the trust document are unclear. Traditional methods for valuing partial interests in trusts offer insufficient guidance to courts in assessing the prudent investor standard, as they often disregard many of the important factors which go into investment decisions--notably, the allocations to different asset classes.
In this paper, we develop a valuation methodology based on Monte Carlo Simulation techniques which allows for economically feasible ex ante valuation of partial interests in trusts. The MCS technique is widely used in modern finance and economics, and is especially useful for valuing partial interests because it can incorporate mortality risk, portfolio asset allocation, varying distributions and the discretionary sale of the trust's assets to fund distributions. We explain how the MCS method can incorporate a variety of assumptions about the income beneficiary's mortality and the trustee's decisions, and show how these factors affect the valuation of partial interests.
What Does a Mutual Fund's Term Tell Investors?
Published in the Journal of Investing, Summer 2011, Vol. 20, No 2: pp. 50-57.
In a previous article, we highlighted a flaw in the average credit quality statistic frequently reported by bond mutual funds. That statistic understates the credit risk in bond portfolios if the portfolios contain bonds of disperse credit ratings. In this article we address a similar problem with bond mutual funds' reporting of the average term of their portfolios. The somewhat ambiguous nature of this statistic provides an opportunity for portfolio managers to significantly increase the funds' risks, credit risk in particular, by holding very long-term bonds while claiming to expose investors to only the risks of very short-term bonds.
Morningstar uses a fund-provided statistic - the average effective duration - to classify funds as ultra short, short, intermediate or long-term. Funds have figured out how to hold long-term bond portfolios yet be classified as ultra short-term and short-term bond funds. We show that extraordinary losses suffered by these funds in 2008 can be explained by the how much the bond funds' unadulterated weighted average maturity exceeded the maturities typically expected in short-term bond funds.