Opalesque Industry Update - Economic variables are falling and risk measures are rising. This is a time to be cautious or
hedged rather than courageous and unhedged.|
Ineichen Research & Management Ltd. (“IR&M”) has just launched a new research product line with a particular focus on risk management. The risk management research is designed to help investors make better risk management decisions in times of heightened uncertainty.
It is becoming increasingly obvious to more and more investors that avoiding large losses and controlling risk is the key to long-term investment success.
Alexander Ineichen, founder of IR&M said: “The key discipline in investment management is risk management. There is no such thing as return management. Large losses kill the rate at which capital compounds. Controlling for tail risk and negative compounding of capital is the essence for long-term investment success.”
Current institutional asset allocation methodology has some serious shortcomings. First, it starts with the risk-free rate of return. However, the term “risk-free rate of return” is in the process of turning into the mother of all oxymorons according to Ineichen. Second, the current process relies heavily on forecasting. However, the failure of most of the financial profession to see the last crisis coming should be cause of great concern. Thirdly, over-zealous regulation is increasingly determining the asset allocation of institutions. This regulation results in de-risking and favours bonds. Portfolios of pension funds and insurers hold government bond-heavy portfolios at a time where monetary aggregates are ballooning and a 30-year bull market in government bonds might soon start to look tired.
Ineichen warns: “Applying financial orthodoxy to the current investment environment could be ill-advised or much worse.”
In IR&M’s inaugural research report ("Europe doubling down"), Ineichen also suggests “lie watching”. The influence of politics is increasingly becoming more relevant in influencing market prices and trends.
“The authorities have a different axe to grind than have investors; they often need to lie. In today’s markets, spotting the lie is not just a profitable endeavour; it is as much a survival necessity,” Ineichen said.
The research consists of a quarterly write-up of which the inaugural issue is titled “Europe doubling down” and is attached to this press release. Weekly on-screen updates have been published since 5 August 2011. Investors can require a free trail for six months. The existing “absolute returns” research will continue to be free of charge.