With U.S. tax reform legislation seemingly poised for enactment, one might assume that policy uncertainty generally—and tax policy uncertainty, specifically—is falling. The reality is more complicated.
The cost of rolling futures contracts, rather than the decline in commodity prices, has been the largest drag on commodity index performance over the past 10 years. Although difficult to implement, asset allocators’ best response may be to develop dynamic execution strategies to mitigate the roll return “tax.”
Momentum has been a consistent component of CTAs since 2004, but its influence on CTA performance remains lower than it once was. This highlights the potential importance of measuring both manager-specific and overall portfolio exposures in risk terms.
Just four factors collectively explain an outsized fraction of the SG CTA Index’s current risk, while elevated long equity and bond exposures may compromise the amount of diversification CTAs now offer.
Currency risk is embedded within CDS prices; if a country defaults, the value of its currency is likely to drop, to the detriment of investors with CDS exposure to that currency. The recently widening gap between European sovereign CDS priced in EUR and those priced in USD may therefore herald rising distress for the European Union as a whole.
The Information Age has transformed and brought spectacular advances to a wide range of industries, from medicine to transportation and beyond. Investment management has been by some measures slower to evolve, but it, too, is changing.