The Paper Trail: Loading the Dice

Happy Thanksgiving week! Who would have thought in November of 2017 that seven years later Bitcoin would once again be the hot topic of conversation at the dinner table...

A lot to be thankful for this year - 2024 brought a new chapter in my career and a new addition to our family. 

I also felt a deep sense of gratitude this past week at the Schwab Impact conference. For those unfamiliar, Impact is the biggest (to my knowledge) financial advisor conference in the country. Nearly 5,000 people attended the 34th annual gathering, this year emanating from the Moscone Center in San Francisco.

I attended many Impact conferences during my ~16 years working in wealth management, but this was my first one since pivoting over to the asset management side of the business and my first time being a featured speaker. It was a privilege to represent Cliffwater on stage as I gave a brand new presentation titled:

Perpetual Motion: The Evolution and Growth of Evergreen Private Markets Funds for RIAs

I've done a few solo speaking gigs over the years, but nothing consistently enough for it to be second nature. As someone who has been interviewed on dozens of podcasts and participated in countless conference panels, I can say with confidence that standing on stage alone for an hour is a different animal entirely.

Despite the natural butterflies ahead of time, I couldn't have been happier with how it went. I received some great feedback afterwards and look forward to taking this talk "on the road" in the coming months. I'm tremendously thankful I get to do this sort of thing about a topic that I am so passionate about!

Now, please enjoy the November 2024 edition of The Paper Trail. This month's research roundup features:

• Pairing trend-following and long-short quality
• Stock and bond correlation
• Emerging market debt
• Private infrastructure
• European private equity
• Finding an edge in secondaries
• The evolution of alpha
• Sizing long volatility strategies
• Commitment pacing in private markets
• Machine learning applied to stock selection
• Capturing the low-volatility anomaly

Are trend-following and long-short quality strategies a match made in heaven for portfolio protection?

"These events highlighted the limitations of trend-following as a first line of defense in portfolios. To address this, combining trend-following with complementary strategies like long-short quality can provide more reliable protection and enhance portfolio defensiveness."

Trend-Following and Long-Short Quality: Loading the Dice (Man Group)

What causes the correlations of stocks and bonds to change over time?

"Following the pandemic in 2022, the Fed embarked on interest rate hikes to combat high inflation. Equity markets subsequently suffered the most significant drawdown since 2008. Unlike previous periods, however, fixed income assets also experienced sharp negative performance as interest rates jumped. After the shift in rates in 2022, traditional fixed income correlations with equities rose from -40% to 60%."

Using fixed income to avoid downside risk (Verus)

Is the Emerging Market Debt asset class misunderstood?

"EM debt used to be characterized by a higher distribution of more extreme outcomes. But now its distribution of returns resembles that of more mainstream asset classes such as U.S. corporate debt."

Emerging Markets: The Biggest, Fastest Growing, and Arguably Least Understood Pool of Credit in the World (PIMCO)

How has the opportunity set in private infrastructure shifted over time?

"Twenty-first century infrastructure investing includes telecommunications assets such as cell towers and data storage, emerging technologies in clean energy, and “platform companies” intended to scale their operations rather than investing in single assets. This means growth opportunities are significantly more substantial today. Operational expertise is therefore more important than ever to develop assets and drive returns versus simple financial structuring."

Private Infrastructure: Secular Themes Offer Compelling Opportunities (Cambridge Associates)

Does Europe offer compelling opportunities for private equity investors?

"Compared to the U.S., Europe’s PE market is less saturated, particularly in the lower mid-market. This implies less competition for deals, which leads to more favorable entry multiples and less inflated valuations. While the average EBITDA purchase multiple in 2023 for leveraged buyout transactions was 10.2x in Europe, it was 13.3x in the U.S."

Why Europe? Why Now? (CF Private Equity)

Is there alpha to be had in the small- and mid-market buyout (SMB) segment of the private equity secondaries market?

"Access to some of the best opportunities can serve as a key source of competitive edge for select secondary market buyers, and we believe secondary investors targeting SMB funds are well placed to capture this edge. SMB funds tend to have smaller LP bases, and we find that SMB GPs place a higher value on existing relationships with their primary capital providers than other segments of private equity. As a result, the potential benefits that accrue to secondary firms that also have strong primary relationships are often even more pronounced with SMB GPs."

Where Does Competitive Edge Exist In the Secondary Market? (Adams Street)

How has the pursuit of alpha in hedge funds evolved over the past two decades?

"The multi-strategy, multi-manager business model has gained prominence by blending the capital efficiency of the multi-strategy fund model with the diversity of investment styles often found within portfolios of fund of funds, in addition to often incorporating sophisticated risk management tools to deliver high levels of Alpha by hedging out beta and factor risk."

The Evolution of Alpha (ClearAlpha Technologies)

What is the optimal size of a long volatility strategy in a portfolio?

"The answer is (of course), it depends. More specifically, it depends on your current portfolio mix, how you choose to access long volatility, and what implementation techniques you are willing to use."

The Absurdity of Certainty (One River Asset Management)

How should allocators think about pacing their private market commitments?

"For new programs, we typically seek consistent, sustained annual commitments at a level that builds the program to its target allocation within five to seven years. We believe that a faster commitment pace increases the risk that a program becomes overly sensitive to specific points in a market cycle. Conversely, we believe a slower target commitment pace generally brings an opportunity cost of not reaching a target allocation within an acceptable timeframe and potentially missing out on the long-term benefits of investing in private markets."

Private Market Commitment Pacing (Meketa)

Can machine learning techniques improve stock selection strategies?

"Using small, simple, linear models to build stock selection portfolios misses nonlinear relationships between the predictor variables and returns, leaving money on the table. Large, complex models overcome this limitation, better estimate the nonlinear relationship between predictors and optimal portfolio weights, and generate better stock selection performance—the so-called virtue of complexity in the cross-section."

Can Machines Build Better Stock Portfolios? (AQR)

Can the use of leverage improve the odds of capturing the low-volatility anomaly in equities?

"By applying leverage to low-risk stocks, our strategy is able to more fully exploit the mispricing and extract the anomalous returns. At the same time, the use of a risk model to control tracking error helps to manage the risks associated with leverage and results in a more market-aware approach."

Low-Risk Alpha Without Low Beta (Robeco)