By Margaret M. Towle, PhD, CIMA®, CPWA®, CAIA®
For example, Dominick Paoloni, in “A Study in Portfolio Diversification Using VIX Options,” is on a mission to find a dependable, low-cost tail protection hedge from events such as the 1987 crash. Paoloni asks: Can passive long volatility exposure be value-added over the long term with minimal cost? Or, in his own words, “Can the portfolio continuously wear a seat belt in all types of markets with a minimal cost to carry?” He concludes it can—by using an out-of-the-money laddered VIX strategy that can provide a strong diversifier with an acceptable cost of carry.
In “The Implied Longevity Curve,” Moshe Milevsky, Thomas Salisbury, and Alexander Chigodaev contend that markets provide predictive research relevant for advisors managing post-retirement assets. The authors use life annuity prices to extract information about market views of survival probabilities, developing a framework that links the term structure of mortality and interest rates. Their pithy summation: “Annuity purchase procrastination might prove beneficial to health but hazardous to wealth.”
Those who manage retirement assets know that a robust retirement income strategy involves many unknowns, including asset returns, inflation, spending policy, and—most importantly—lifespan. To grapple with these uncertainties, Michael Finke and David Blanchett suggest a flexible approach that varies spending based on remaining longevity and account balance. They propose a dynamic withdrawal strategy that relies on annuitization and a retiree’s budget flexibility. This innovation also reduces the risk of retirees outliving assets when markets underperform.
And Mark Anson is not content to accept the limitations of using illiquid private-asset return streams for asset allocation models, risk budgets, or an optimization function. Anson devised a novel solution to the illiquidity dilemma of private equity assets. By using lagged betas, he is enhancing CAPM theory to include more periods than just the current stock-market return, expanding the discussion of how to allocate illiquid assets and allowing allocators to determine the true amount of systematic risk embedded in returns.
We are pleased to include the winner of the 2015 Academic Paper Competition, “How Smart Are Smart Beta Exchange-Traded Funds?” This article, by Denys Glushkov, is one of the first to comprehensively evaluate domestic equity smart-beta exchange-traded funds (SB ETFs). Glushkov explores a number of issues, including the following:
- Do SB ETFs provide investors with intended exposures to factors, such as size, momentum, value, quality, and volatility?
- Do these factor tilts result in improved risk-adjusted performance?
- What is the relative return of static versus dynamic factor exposures of SB ETFs?
In general, Glushkov finds no conclusive evidence that SBs outperform their benchmarks on a risk-adjusted basis. However, editorial board member, Jason Hsu provides some counterpoint. Hsu observes that SB ETFs are not heterogeneous and thus do not lend themselves to simple comparisons and he notes that some of Glushkov’s SB categories include offsetting pairs, which could distort the findings.
As always, I thank members of the editorial board and IMCA’s editorial staff for their commitment and efforts.
Margaret M. Towle, PhD, CIMA®, CPWA®, CAIA®