Research & Insights

Our investment decisions flow from incisive perspectives.

October 2014

Kai W. Hong, CFA
Managing Director & Chief Investment Strategist

On the whole, October looked like a perfectly reasonable recovery from the declines of the prior month.  However, end-point results masked significant intra-month volatility as the markets swung from bearishness to bullishness in the blink of an eye.  Despite the Fed’s re-affirmation of their guidance to keep interest rates low for a “considerable time”, macroeconomic concerns in Europe and China gave the bears reasons to sell mid-month.  Better US data (capped by a 3.5% GDP growth reading for Q3) and strong US company earnings reports reignited the rally, and a surprise increase in monetary easing in Japan sustained it.

The US broad market Russell 3000 Index finished the month at +2.8%.  US small cap stocks rebounded strongly from the prior month’s underperformance with the Russell 2000 Index returning +6.6%.  Outside of the US, returns were weaker with the developed market MSCI World ex USA Index returning -1.6% while the MSCI Emerging Markets Index returned +1.2%.

Active manager performance was mixed with the best relative performance coming from overweights to smaller size, low volatility, and stability.  Market volatility as measured by the VIX spiked significantly mid-month before falling back while cross sectional volatility inched up slightly.  That said, at month end both measures remained fairly below their long-term averages.  Volumes increased quite a bit month-over-month but were also below their long-term averages.  In this environment, style was not strongly predictive of relative results as portfolio positioning and individual security selection was more relevant.

Risk and the Real World | September 2014

Kai W. Hong, CFA
Managing Director & Chief Investment Strategist, Bivium Capital

Fundamentally, risk can be seen as the probability of not meeting one’s expectations. In this context, risk may lead to positive or negative outcomes, but most focus is given to downside risks (a negative result on both an absolute and relative basis) and opportunity costs (a positive result on an absolute basis, but a negative result on a relative basis). The challenge is in defining what those expectations should be and determining how to react when outcomes diverge meaningfully from those expectations.