Bond Portfolio Duration

Duration is a measure of the effective maturity of a bond or bond portfolio. A higher duration is indicative of higher price risk, particularly in response to changing rates. Thus, if interest rates rise and bond prices fall, a bond with a higher duration will experience a sharper drop in price. Given the relatively low level of interest rates in the current market, bond investors have moved to lower duration portfolios, as protection against expected increases in rates. (See article here, Wall Street Journal.)

Increased Leverage = Less Risk?

All else equal, the use of leverage increases investment risk. But, can it ever have the opposite effect? Investors using the so-called risk parity trade believe the answer is yes. Under this approach, a portfolio is built using equity and debt, but the debt is purchased using leverage. The strategy is based on two key points: (1) equity is more volatile than debt and (2) debt returns are negatively correlated to equity returns. Thus, with leverage, the debt returns are in effect more volatile. When combined, the negative correlation creates a less risky portfolio as the equity and debt returns balance each other out. See article here, Wall Street Journal.

R-Squared and Fund Selection

R-squared is the correlation (i.e., r) of a fund to its benchmark index multiplied by itself (i.e., squared). R-squared measures how closely a fund tracks its respective index. A recent article (see here, Wall Street Journal) suggests that investors should search for actively managed funds with low R-squareds, as this suggests the manager is truly trying to add value by concentrating on specific sectors of the benchmark universe. However, doing so increases systematic risk. So, there is a tradeoff.

Circuit Breakers in Response to Flash Crash

Following the "Flash Crash," the exchanges implemented single stock circuit breakers (in addition to the market-wide constraints that already existed). These new circuit breakers are already under review, with planned changes set to go into effect in April. See article here, Bloomberg.

Snow Futures?

Futures contracts are typically viewed as speculative investments; however, much of the activity in such contracts is the result of hedging. For example, insurance companies use weather derivatives to hedge exposure to natural disasters, while farmers and food producers would transact in agricultural futures. The most recent addition to such categories is snow futures. See article here, CME Group.

Are Hedge Funds Worth It?

Hedge funds typically charge high fees for their services -- generally a 2% yearly management fee plus 20% of profits. When this is factored in, most investors would be better off choosing a low cost ETF. See article here, The Economist.