Financial Analysts Journal Editor’s Snapshot: Examining the Impact of Volmaggedon on Decarbonizing the World

Key Points:

• In the latest issue of the Financial Analysts Journal, contributors explore topics such as Volmaggedon, American Depositary Receipts (ADRs), soft commissions, carbon emissions, the end of the hedge fund era, and the predictability of bonds.
• Andrew Lo reflects on the adaptation of financial practice with technology over the past 75 years, mapping the evolution of the financial system against technological development and regulatory milestones.
• Researchers examine the market crash of short volatility strategies known as Volmageddon and the failure of short volatility products, shedding light on the negative feedback loop and the pitfalls of hedge and leverage rebalancing.
• A study on ADRs reviews their performance and impact on Chinese and global firms, expressing concerns about the future of Chinese ADRs due to the “Holding Foreign Companies Accountable Act” and other legislation.
• A systematic review of the literature on soft commissions and research unbundling provides insights into the consensus on agency conflicts and the costs of bundling, as well as the impact of MiFID II legislation on research quality and coverage.
• An analysis of different climate risk measures and their impact on portfolio carbon outcomes and risk-adjusted returns explores the potential for decarbonizing portfolio construction.
• A study on hedge fund performance post-2008 reform and central bank interventions suggests a decline in aggregate performance and the need for investors to calibrate return expectations from hedge funds downward.
• A study on predicting bond returns over a 70-year period demonstrates the predictability of government bonds and the potential for active bond fund management.

The CFA Institute Financial Analysts Journal 2021 third quarter issue delves into a range of topics that are relevant to financial analysts. From examining market crashes and legislation to analyzing climate risk and predicting returns, the journal provides valuable insights for professionals in the field.

The issue begins with Andrew Lo’s reflection on the adaptation of the financial system to technology over the past 75 years. Lo defines eight eras of financial evolution and maps each era against technological development and financial and regulatory milestones. His analysis offers a comprehensive overview of how the financial practice has co-evolved with technology.

One of the key topics explored in the journal is the market crash known as Volmageddon, which occurred in 2018 and resulted in the failure of some inverse VIX exchange-traded products. The article by Patrick Augustin, Ing-Haw Chen, and Ludovic Van den Bergen walks readers through the steps of the negative feedback loop that created Volmageddon and highlights the pitfalls of hedge and leverage rebalancing during times of concentrated markets and volatility spikes.

In addition, the journal features a study on American Depositary Receipts (ADRs), which allow US investors to participate in foreign equity on US markets. The article reviews the performance of ADRs of firms from across the world and raises concerns about the future of Chinese ADRs due to legislative changes.

Another topic covered in the issue is soft commissions and research unbundling, which has been a subject of debate and legislation for years. The article provides a comprehensive review of the literature on soft commissions and offers insights into the consensus on agency conflicts and the costs of bundling. It also discusses the impact of MiFID II legislation on research quality and coverage.

Climate risk and decarbonization are also explored in the journal, with a study analyzing the use of different climate risk measures in portfolio construction. The researchers examine the strengths and weaknesses of various carbon metrics and attempt to construct a “decarbonizing” factor for portfolio management.

The issue concludes with a study on hedge fund performance and the predictability of bond returns. The study on hedge fund performance suggests a decline in aggregate performance after 2008 and provides insights into the factors that have contributed to this decline. On the other hand, the study on bond returns demonstrates the predictability of government bonds over a 70-year period and highlights the potential for active bond fund management.

Overall, the latest issue of the Financial Analysts Journal offers valuable insights into a range of topics relevant to financial analysts. From market crashes and legislation to climate risk and portfolio management, the articles provide professionals in the field with new perspectives and research findings to inform their work.