Tagged: alpha

Risk-Free Return

Everybody is talking about the weather. Why doesn’t somebody do something?

This witticism on human futility is often attributed to Mark Twain but traces to Twain’s friend and collaborator Charles Dudley Warner. A century later, it’s still funny.

There’s a lot of hand-wringing going on about interest rates, which from the IR chair may seem irrelevant until you consider that your equity cost of capital cannot be calculated without knowing the risk-free rate.

That and a piece in Institutional Investor Magazine some weeks back brought to my view by alert reader Pam Murphy got me thinking about how investors are behaving – which hits closer to investor-relations than anything.

When I say hands are wrung about rates, I mean will they go up? We’ve not had normalized costs of capital since…hm, good question. Go to treasurydirect.gov and check rates for I-Bonds, the federal-government savings coupon. I-Bonds pay a combination of a fixed rate plus an inflation adjustment. Guess what the fixed rate is? 0.00%. The inflation-adjusted return May-Oct 2013 is 1.18%.EE-Bonds with no inflation adjustment yield 0.20% annually. This is a 20-year maturity instrument. Prior to 1995, these bonds averaged ten-year maturities and never paid less than 4% annually, often over 7%. If the I-Bond pegs inflation at 1.18% every six months, translating to 2.36% annually, is the risk-free rate of return a -2.16%? (more…)

Alpha Bet

We smell autumn on the wind in Denver.

Soon the backbone of the continent will transform from verdant to orange and yellow and caramel as the aspens salute departing summer. It’s a process spanning weeks, an epoch compared to equity-market timeframes nowadays.

Investors want an edge, and it’s important for investor-relations pros to recognize what that means. It seems like everyone has lost patience with patience. One IRO lamented this week: “I am now starting to be convinced that are very few ‘rational’ price-setters. Even the long-only funds are very short-term.”

It’s against insider-trading law for advantage to spring from valuable information gleaned privately from another person, so instead traders are winnowing the public social chaff of the many for “alpha” – a way to outperform expected market returns.

Social Market Analytics, a Naperville, IL firm run by PhDs in theoretical chemistry and electrical engineering, tracks what it calls S-factors, turning tweets into data science for identifying stocks and sectors signaling directional outperformance. (more…)