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Recent Research: Highlights from February 2015

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"On the Holy Grail of “Upside Participation and Downside Protection"
The Journal of Portfolio Management (Winter 2015)
Edward Qian

Upside participation and downside protection” is a popular motto for many investors. It has taken on much more significance in recent years, in the wake of the global financial crisis. But how do we define and evaluate strategies from the perspective of “upside participation and downside protection”? In this article, the authors present an analytic framework in which they provide a quantitative definition of upside and downside participation ratio, define participation ratio difference as a goodness measure for defensive strategies, and prove a relationship between the participation ratio difference and traditional alpha. As an illustration, they apply this new analysis to the S&P 500 Index and its 10 sectors and show that defensive, low-beta sectors tend to have positive participation ratio differences, while cyclical, high-beta sectors tend to have negative participation ratio differences. This finding is consistent with the low-beta/volatility anomaly and provides another explanation for the popularity of low-beta/volatility strategies.

"Social Security Costs in the Larger Context of Retirement Saving"
The Journal of Retirement (Winter 2015)
Sylvester J. Schieber

There has been a great deal of discussion in recent years regarding the implications of the shift from defined-benefit to defined-contribution retirement plans on workers’ ability to adequately provide for their retirement security needs. There has been almost no discussion about the changing economics of participation in the U.S. Social Security pension system and the implications for the burden on workers attempting to save for retirement. In its early years, Social Security benefits were highly subsidized and now present an implicit tax on retirement saving for many workers. The analysis here presents the magnitudes of these shifts for workers at different points in the earnings distribution.

"A Multi-Family Office (MFO) ‘Investment Manifesto’"
The Journal of Wealth Management (Spring 2015)
Scott Welch and Jamie McIntyre

How should advisers and multi-family office (MFO) professionals serving investors and families be building portfolios and running their businesses? How can they help clients to achieve evolving goals and objectives and/or take advantage of industry trends? Are there “best practices” among successful, profitable, and fast-growing advisers that can be identified, analyzed, and adopted? This article is a summary of six available tools or solutions available to MFOs that can empower them to build portfolios and manage practices that are well-positioned to address the sophisticated and evolving demands of the HNW families of the future.

"Liquidity Coverage Ratio Requirement Increases Cost of Securitization for U.S. Banks"
The Journal of Structured Finance (Winter 2015)
Rachel George and Tim Mohan

In September 2014, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) adopted a final rule regulating the liquidity risk of banks in the United States. The Final Rule will impact banks participating in the securitization market in many ways and the authors summarize three of them in this article. First, the Final Rule will increase the cost of unfunded commitments extended by a bank in a securitization credit facility transaction. Second, the Final Rule will increase the costs incurred by a bank that sponsors a securitization of its own assets. Third, the Final Rule will decrease a bank’s appetite to invest in structured finance securities. It remains to be seen whether the new regulation designed to improve the liquidity risk profile of banks will reduce overall market liquidity by steering banks away from the securitization market.

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