Jev Mehmet, CEO of Coremont
The evolving interest rate environment represents fertile territory for global macro managers and asset managers seeking to diversify into alternative investment strategies. Government bonds are increasingly attractive now that yields are favourable and equity valuations face an uncertain Q1 2023, while still not historically cheap. Inverted yield curves in G3 currencies present an opportunity to express a view on potential future rate-cuts and curve flattening.
Generating alpha against this background requires precision in hedging – small residual risks can give rise to significant P&L swings, in light of current market volatility. Managers must take steps to ensure that investment decisions are informed by rigorous and granular risk analysis, including the ability to observe, on a pre-trade basis, the impact of potential hedging trades on a portfolio’s risk profile.
Coremont empowers clients with portfolio management tools incorporating advanced risk analytics across a wide range of derivatives. For example, the ability to express views using option strategies and see the resulting curve and volatility risk in detail allows clients to leverage up exposure, while limiting downside risk.
The present market environment inevitably exposes any deficiencies in technology and data and managers must have confidence in the capacity of their systems to handle large trade volumes with no compromise in the timeliness and accuracy of their risk and P&L attribution. At Coremont we help clients manage their risks at micro and macro levels. This ranges from explaining how day-to-day P&L is generated from sensitivities and market moves to understanding how a sudden large shock in certain markets may impact their overall cross-asset portfolio. Integral to this framework is the flexibility to view risk in different ways; for example, clients can observe curve risk through parallel rate moves, bespoke scenarios or PCA.
At Coremont it is our mission to equip clients with the data and technology to make timely and informed decisions in response to unexpected market events.
Kevin Hanney, President, CapitalArts Global, LLC
The ramifications of the events of the past year will be felt long into the next one, particularly the consequences of major geo-political shifts and a marked change of direction in monetary and fiscal policy. While the past few years have witnessed central banks and governments looking to support global markets, we have seen a significant change to tame inflation in major economies from the likes of the Federal Reserve and the Bank of England. The Fed, in particular, faces a material risk of overtightening and consequent hard landing as it targets inflationary pressures primarily within the U.S. labour force while the U.S. economy simultaneously seeks a new equilibrium. Traditional measures of U.S. job growth and wage pressures are unlikely to offer useful insight in this environment as many U.S. Manufacturers restructure their supply chains by onshoring critical components, and the U.S. Services sector continues its hiring binge in an effort to bring unused capacity back online to meet Post-Pandemic demand. In theory, the long-term impact of additional capacity and more secure supply chains should be disinflationary. However, the blunt instrument of monetary policy is unlikely to distinguish between these necessary costs of structural changes to the U.S. economy, and the unrestrained spending on discretionary goods and housing that was fuelled by the economic rescue packages of the Lockdown. A significant risk of unintended consequences for the U.S. economy exists and the reverberation beyond its borders must be priced into prudent investment theses.
For financial markets, this means the sustained volatility and volumes are likely to continue to pose problems next year. Exacerbated by a poor outlook for global economic growth, 2023 is set to be a challenge from a liquidity perspective and across all asset classes. While the macroeconomic outlook makes for unsettling reading, it is important to remember that markets rarely follow economics in orderly straight lines.