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Research

2019

Market Insights

Floor It: Market Pricing of the Lower Bound on Interest Rates

In the face of economic damage and structural changes following the global financial crisis, major central banks tested the lower limits of their nominal policy rates over much of the following decade. In this piece, we explore certain implications of the lower-bound constraint on financial markets and conclude that market pricing failed to fully account for this new paradigm.

2019

Market Insights

Positively Negative: Stock-Bond Correlation and Its Implications for Investors

In this paper, we contend that the negative stock-bond correlation regime observed over the preceding two decades has been driven largely by major central banks’ success in lowering inflation and anchoring inflation expectations. We confront that hypothesis with a combination of theoretical and empirical evidence and discuss potential implications of this correlation regime.

2018

The Peterson Institute

QE: A User's Guide

Even though Quantitative Easing (or “QE”) has assumed a prominent role as a policy instrument for central banks, the implementation of QE has differed significantly both across countries and over time. This Policy Brief—which was co-authored by Brian Sack, the D. E. Shaw group’s director of global economics—drew on the literature measuring the effects of QE as well as the historical experience in implementing QE to lay out a simple strategy for how to use it.

2014

Market Insights

Shale Game: Market Dynamics in North American Natural Gas

We argued that, while the emergence of large-scale shale gas production in the United States had greatly expanded natural gas (NG) supply and generally moderated long-term volatility, the impact of shale gas on the NG market was less uniform and more complicated than might have been suggested from readings of the popular press.

2014

The Peterson Institute

Monetary Policy with Abundant Liquidity: A New Operating Framework for the Federal Reserve

This Policy Brief—which was co-authored by Brian Sack—proposed a new operating framework to allow the Fed to conduct monetary policy while maintaining a substantially elevated balance sheet and abundant liquidity in the financial system. In particular, it argued that the Fed should set the interest rate at which it would offer over-night reverse repurchase agreements as its policy instrument and maintain the interest rate paid on bank reserves at the same level.

2012

Market Insights

130/30 Version 2.0

We believed a fresh look at 130/30 was warranted, as this investment approach could, when robustly implemented, improve risk-adjusted performance relative to long-only portfolios. The poor historical results of many 130/30 products, we argued, stemmed largely from implementation problems specific to certain managers or investment approaches rather than flaws in the theoretical foundations of 130/30.

2012

Market Insights

Two Reinsurance Paradigms

This piece presented an examination of the two main paradigms in reinsurance—diversification and risk aversion—followed by an analysis of why our particular approach to reinsurance investments typically yielded a riskier, more concentrated, but we also think ultimately more attractive, portfolio than the strategies employed at the time by many of our peers.

2011

Market Insights

Unwanted Advances: Valuing Subprime Mortgages after the Crisis

The market for U.S. residential mortgage-backed securities (RMBS) took a turn for the worse in 2011, particularly in the subprime segment. We sought to bring some clarity to this corner of the capital markets by focusing on two overlooked dynamics: loan servicer behavior and the negative duration of subprime floaters.

2011

Market Insights

Diversification and Beyond: The Comparative Benefits of Multi-Strategy Investing

We believe that managers of multi-strategy funds offer investors advantages they could not obtain from managers of single-strategy investments, including a better value proposition, better alignment of incentives, more efficient capital allocation, and better risk management. This paper first considered the structural advantages of the multi-strategy approach and then addressed some common criticisms.

2010

Market Insights

Mind The Gap: Optimism vs. Pessimism in the Macro Investing World

After some spectacular successes at the height of the financial crisis, the macro hedge fund sector muddled along for much of 2009 and 2010. On balance, we felt optimistic about opportunities for macro at the time, finding the environment compelling on the basis of its offering broad (if not always deep) liquidity, coupled with a large amount of pricing inefficiency. In this piece, we attempted to account for the difference of opinion between our 2010 view of the risk-adjusted opportunity and the apparent consensus among the broader macro community.

2010

Market Insights

Short Circuit: New Restrictions on Short Selling in U.S. Equity Markets

In February of 2010, the U.S. Securities and Exchange Commission voted to implement a rule that reimposed constraints on the execution of short sales. Dubbed the “alternative uptick rule,” the rule has two major components, a “circuit breaker” and a “passive bid test.” We considered the alternative uptick rule in this entry of our Market Insights series.

2010

Market Insights

Lessons from the Woodshop: Common Sense in Managing and Measuring Leverage

This piece was an examination of aspects of leverage that merit consideration by investors evaluating levered investment portfolios. Put simply, folks think a lot about the question, “How much leverage?” but not very much at all about the questions, “Why is the leverage being used?”, “Under what terms and conditions is the borrowing being done?”, and “How is the leverage quantity being computed?”

2009

Market Insights

Is It Better Yet? Charting the Course of Various Asset Classes through a Global Financial Crisis

In a financial crisis, it’s often said, “all correlations go to 1.” That may or may not be the case. More certain, however, is that crisis-induced dislocations will move various asset classes and market indicators in surprising directions. Covering much of the painful period of the most recent financial crisis, this piece examined the performance of a number of different asset classes from January of 2008 through June of 2009.

2009

Market Insights

Time Portals and Other Illusions: Some Common Trading Mistakes and Their Unhappy Consequences

We took a closer look at some real-world examples of common investor mistakes across various classes of market participant, whether amateur or professional and whether banker, hedge fund manager, insurance company executive, fund-of-funds operator, high-net-worth individual, or mutual fund investor. We consider ourselves something of an authority on the subject of mistakes not only because we’ve seen others make them, but also because, over thirty-plus years, we’ve made our share.

2009

Market Insights

The Basis Monster That Ate Wall Street: The “Cash-Synthetic” Basis Has Moved in Dramatic Ways, Creating Risk . . . and Opportunity

During the financial crisis, cash-synthetic basis became so volatile and pervasive across a number of credit instruments that many took to referring to it simply as “the basis.” We discussed our approach to incorporating cash-synthetic basis in our analysis, including an examination of the relationship between cash bonds and related credit default swaps and interest-rate swaps.

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