Risk and Reward Quarterly Update

The new edition of Risk & Reward showcases the breadth of our research: from querying subjective expectations to examining sophisticated risk-mitigation strategies for equities and bonds, ESG and sovereign debt restructuring. 

Our lead article is a testament to the success of our ongoing collaboration with leading academics. Together with three experts from the finance departments of renowned US universities, we analyzed the capital market assumptions (CMAs) of institutional investors to find out whether their subjective beliefs could be used to mitigate risk and generate alpha. A review of their paper points to promising results, far more relevant information than retail investor surveys. After presenting their work, we also spoke to the three authors of the study in an exclusive interview.

In this issue, we also take a closer look at the energy transition, a monumental task for decades to come. But the challenge is not without its opportunities for equity and commodity investors, as huge amounts of capital will be needed. Read to learn why we think decarbonization and healthy returns aren’t mutually exclusive. In fact, we believe you can’t have one without the other.

Our focus then turns to the merits of trend-following strategies, particularly in times of market stress  when they lead to lower investment ratios – and thus lower portfolio risk. But strong market rebounds can have a limiting impact on their success. Discover how our researchers deal with these ‘momentum crashes’ to smooth returns.

And ESG is growing ever more popular among fixed income investors. But investing in green bonds issued by governments often comes with higher interest rate risk. For Euro treasuries, the average duration of green bonds is almost twice that of their conventional counterparts. We examine a concept that allows sustainability-tilted bond investments without risking huge deviations from a traditional benchmark. Yes, you can have a sustainable bond portfolio with a low tracking error. 

Our final article looks at how value recovery instruments (VRIs) can make sovereign debt restructuring easier for everyone. Learn how they work and what makes them such an interesting tool for issuers and investors.