Readings: Outsourcing Wall Street, Regulatory Debauchery, PMS vs. Mutual Funds
Wall Street’s plight is India’s opportunity, just as software companies, computer service providers and generic drug makers have discovered in their industries.
Amba, which is based in New York and has about half of its 550 employees in Bangalore, says it’s even testing strategies and models for quantitative hedge funds. For other hedge fund clients, Amba does everything except give advice on the size and timing of an investment.
- Prudent Bear: Regulatory Debauchery, by Satyajit Das
The US central bank’s strategy is clear. The current credit problems require a substantial reduction in the level of borrowings and leverage in the global financial system. Asset prices ramped up by excessive debt need to adjust. The adjustment can take place via a “crash”. This would be de-stabilizing and would wreak further havoc on already weakened banks. Alternatively, the de-leveraging and price adjustment can be achieved by creating inflation through loose monetary policy. If asset prices remain at current levels, higher inflation allows values to fall in real terms. Higher inflation also reduces the value of the borrowings that must be paid back allowing the required reduction in leverage.
- Economic Times: Flexible models help PMS cos beat mutual funds
PMS providers follow the more advanced models such as CPPI (constant proportion portfolio insurance) or DPI (dynamic portfolio insurance), while regulations require mutual funds to follow the basic ‘static-hedge’ model.
In the static hedge model, the fund manager allocates a pre-determined percentage of the portfolio to debt instruments to the extent that their value is equal to the investor’s capital. The rest of the portfolio is invested in the riskier equity instruments for boosting returns.
The CPPI model, which most PMS providers follow, is based on the static model, but allows rebalancing of portfolios with higher percentage of equity allocation, as per pre-determined metrics. Accordingly, PMS providers invest most of the money in shares and move swiftly to debt instruments, when markets fall and the value of the portfolio falls below a pre-determined level.
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