Bank of America Merrill Lynch has taken recent market volatility as an opportunity to examine the way risk-parity strategies work in the real world. While analysts say the strategies might have exacerbated sell-offs, they are fairly confident the worst is over for all-weather funds.
Collateralized loan obligations managers now believe that spreads on their deals are wide enough, compared with commercial MBS spreads, that insurers will soon return to CLOs. Many major insurers had shifted to commercial MBS after the bond market rout in June, hoping to lock in high yields.
The gap in yields between Spanish and Italian bonds and German Bunds has narrowed to its tightest spread in two years as the "holiday-season lull" and subdued political atmosphere drive investors to seek riskier eurozone debt. "No news is great news for riskier product," said Ciaran O'Hagan and Vincent Chaigneau of Societe Generale. "Some usually cautious investors are profiting from the calm to add some risk."
The Basel Committee on Banking Supervision released in June a paper to deal with counterparty credit risk for derivatives, but the new methodology for measuring that risk fails to consider some low-volatility Asian currencies, according to Jean-Marc Schwob, global head of counterparty risk at SunGard in Sydney. "I would have liked to see the Basel Committee opening the door to banks being allowed to use individual volatility numbers to calculate weighting factors," Schwob said. "... This is a crude, conservative methodology that is still a long way from representing best practice."
Market volatility has less of an impact on the earnings of companies implementing strong risk-management policies than on those with weak risk-management practices, according to a study by Factory Mutual Insurance. Firms with sound risk-management practices for their facilities saw their income fluctuate by average of 18%, compared with a 31.4% average fluctuation experienced by those with weak risk management, the study found.