AQR had a short paper defining/exploring different types of arbitrage in support, I believe, of the AQR Diversified Arbitrage (ADAIX) which combines convertible arb, merger arb and AQR includes event driven too. This quote was especially interesting.
Merger arbitrageurs earn a liquidity premium by stepping in to buy shares from these investors, effectively selling insurance against deal failure.
So merger arb is a variation of risk transfer? I'm not convinced but it is an intriguing thought. Catastrophe bonds are an example of risk transfer.
Quantica had a paper about how to weigh trend following during lower interest rate regimes versus higher interest rate regimes. The TLDR is in low rate regimes, in the context of a 60/40 portfolio, they found 55% equities, 35% fixed income and 10% trend to be optimal. In a higher rate regime, they found 55/25 and then 20% in trend to be the sweet spot.
A big part of their conclusions have to do with correlations between equities and fixed income changing depending on interest rate levels.
I would chip in a point I make frequently which is that with T-bill rates higher, the cash held to collateralize the futures is yielding more. T-bills yield in the low fours these days versus single digit basis points a few years ago. Everything else being equal, that's close to 400 basis points of extra return accruing to the fund. Managed futures is struggling this year and I think it is far more about choppiness of markets than having anything to do with rates, by their work we should have more in managed futures these days.
Did managed futures do so well in 2022 because of the correlation between stocks and bonds or because yields went up quickly and steadily so maybe the various managed futures funds were simply on the right side of the trade? That is refutable though because interest rates went down steadily for many years in the 2010's but the strategy did poorly. I think it's much simpler to think of managed futures as a "second responder" to a crisis or deep decline.
The line between diversifier and core holding is probably debatable. 10% may not be enough to be a core holding (debatable) but 20% into a strategy or asset class makes it a core holding, not a diversifier.
Here's a story about successful aging from Walker Fire. A former firefighter and chief is our station boss and also knows how to fix just about everything. Station boss means he coordinates certain aspects of calls for service like setting up when we need a helicopter to land at the station, he keeps track of who is on the call and in what vehicle and a couple of other things. He's 81 and is no stranger to crawling under trucks or climbing up on top of them.
We had a call for service on Friday for a HAZMAT, it was propane leak. When a call for service comes in, part of my initial process is to see who responds over the radio that they can come to the call, know what their training level is and figure out what vehicles to take based on the details of the call and who is responding. Because it was a HAZMAT of unknown severity, Prescott Fire (one of the big career departments here) was also dispatched.
The station boss asked me over the radio which vehicle he should pull out (he lives right behind the main station so he's always the first one there). Knowing Prescott was sending an engine and that two of our firefighters were responding from one of our substations in one of our engines, I said that I was just going to stop by the station to pick up my turnouts (structure fire PPE which is appropriate for this type of call) and take the command vehicle that is kept at my house.
When I pulled in, I was expecting to run to the back of the station house, where we store the turnouts, but my bag was on the driveway waiting for me and the station boss was pulling an SCBA (air tank) off of the engine at the main station house for me to throw into the back of the command vehicle.
A bag of turnout gear easily weighs 30 pounds, maybe 40 pounds and my bag is on the top shelf in the back because I'm kind of tall, and the station boss is pretty short. Not sure how he got it down, but he did. We keep the SCBAs in very large Pelican boxes, they are similarly heavy and again, he got it off the truck for me no problem. I wasn't expecting any of this, he just did it. 81. I was very impressed.
I think mentioned this in another post, but if you're on Blue Sky, hit me up.
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