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Recent Research: Highlights from August 2013

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"Standing Out From the Crowd: Measuring Crowding in Quantitative Strategies"
The Journal of Portfolio Management (Summer 2013)
Rochester Cahan and Yin Luo

One of the most frequently cited criticisms of quantitative investing has been the charge that everyone uses the same factors and models. In other words, the popular strategies of the last few decades, such as value and momentum, have become crowded, leaving little room for investors to generate alpha. But is this actually true? The authors propose an empirical framework for measuring crowdedness, and use this to study the crowding in common systematic strategies.

"Dodd-Frank Swaps Clearing Requirement and Possible Impact on Securitization Transactions"
The Journal of Structured Finance (Summer 2013)
Kenneth P. Marin and Samuel Hu

On June 10, 2013, interest rate swaps between financial entities and swap dealers or major swap participants became subject to the mandatory clearing requirements of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and the related implementing regulations. Swap clearing is a process by which two parties to a swap face each other through a derivatives clearing organization (DCO) that acts as an intermediary, thereby eliminating direct default risk between the parties. For securitization issuers, the clearing process and the related requirement to post collateral in the form of cash or highly liquid securities are prohibitively expensive and burdensome. Although there are certain limited exceptions to the mandatory swap clearing rules, the availability of such exceptions to newly executed interest rate swaps by securitization issuers is not certain. As of today, interest rate caps and swaps with a conditional notional amount are not required to be cleared under the Commodity Futures Trading Commission (CFTC) first-clearing determination, but such instruments may be required to be cleared in the future. In addition, at this time, no DCO is likely to accept for clearing a swap agreement that contains non-petition and limited-recourse provisions, which are standard provisions in securitization swaps. If no clearing organization will accept securitization swaps for clearing, then such swaps will not be required to be cleared under CFTC pronouncements. Securitization swaps that are not required to be cleared may still, however, be required to post liquid margins to their counterparties under rules that have been proposed by banking regulators and the CFTC.

"The Changing Nature of Global Wealth Creation: Shifts and Trends in the Ultra High Net Worth (UHNW) Community"
The Journal of Wealth Management (Summer 2013)
Stephen Morison, David Lincoln, Benjamin Kinnard, and Zhi Ying Ng

The authors analyze the importance of Ultra High Net Worth Individuals (UHNWIs), a select group of 187,000 individuals worldwide, with a combined net worth of $25.8 trillion. Since 1992, this group has increased their wealth by $19 trillion, making it more important than ever for businesses and consumers alike to understand and access UHNWIs. Three key trends have been identified in the last two decades: Wealth has become more concentrated, with the top 1% of UHNWIs now accounting for 20% of the entire net worth. Second, the number of UHNWIs originating in emerging markets has grown at a faster rate than those from Western economies, a trend that has accelerated since the 2007-2008 global financial crisis. Finally, the globalized nature of UHNWIs has led to wealth hot spots in global cities such as London and New York, causing property prices to decouple from the rest of the country's economy. These three trends appear set to continue in the upcoming years, giving invaluable insight to those affected by the future of UHNWIs.

Sign up for "Pitfalls in Retirement," Wednesday, September 18, 2013, 2:00 P.M. - 2:40 P.M. (Live Q & A: 2:40 p.m. - 3:00 p.m.)

Panelists -

* David Laster, Director, Investment Analytics, Merrill Lynch Wealth Management

* Ani Suri, Multi-Asset Class Modeled Solutions, Merrill Lynch Wealth Management

* Nevenka Vrdoljak, Investment Analytics, Merrill Lynch Wealth Management

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