Risk Is Back

Markets, they say, have long memories. What they forget to add to that cliché is that the memory is also selective! Not too long ago (2008-9), risk was almost completely a no-no. Any kind of leverage was shown the door and those who propagated it were looked at as charlatans. But months and years pass and the memories of those bad times begin to fade. And, the mind, it now seems, is recalling the memories of the good times that one had with leverage! This is what I gather from the reading of a recent article on Zerohedge.(http://www.zerohedge.com/news/2015-02-14/derivatives-no-longer-used-hedging-exclusively-alpha-generation).  It was an interesting piece on an interview done by Citibank on how people viewed derivative products now.

Surprise, surprise! 62% of those polled answered that derivative products are now used for Alpha creation rather than hedging! The takeaway: banks and “sophisticated” investors are increasingly eager to take leveraged risk with derivatives in order to make directional bets on credit spreads. That should be good news for people like us at Growth Avenues and similar organisations. Over the past couple of years I have been pushing this idea to large bracket investors but essentially got polite hearing and very little fund commitment! Not too surprised at that outcome as debt markets have been doing great and most everyone is sitting on or invested into some real estate that has quadrupled or some such! So it would have been quite difficult for them to believe that leverage fits their bill at the moment.

But then, the glory days of real estate are over and interest rates are all set to come down and that ought to take the real estate and debt market down a few pegs as the preferred destination for HNI funds. And, as it always happens, something that is ‘working’ overseas very soon finds its way to our shores. When the same investors hear this spiel of using leverage for creating alpha coming from their current wealth manager (and scores of others who will doubtless join the game), they will change their mind and respond as though it is the most logical thing to do! Never mind that people like me have been talking about it for many months. Unless it comes from the right source, it does not get ratified, I suppose.

My view is that it had to happen. Only a question of when. Maybe I pushed it here before its time had come. I shall now look forward to the local Citi and their brethren to spread this word and do the trick for my business!