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Market Volatility Risk Newsletter - July Edition

If GDP curves will indeed show the anticipated V-pattern as a result of the massive fiscal interventions is far from clear. Some people are already calling for more extensive measures. The recovery of equity markets after the corona crisis sell-off came to a halt after fears of a second wave (and also lack of control of the pandemic in the US and South America) sparked doubt of a quick economic recovery.

Volatilities spiked again and remain in their high and medium regimes. One wonders if algo traders were having a field day? The WireCard accounting scandal was a reminder that risks also lurk in the non-macro sphere and company specific issues.
This year´s summer certainly provides for a less laid-back atmosphere not only at the beach but also on financial markets. Stay safe in the sun!

June Volatility risk newsletter - Keynesian Desires

Infections curves are flattening in most European countries, consequently, lock-down measures were relaxed. Now governments and central banks are trying their best to limit the economic damage and induce a turnaround for declining GDP curves. Other parts of the world are still expecting peak times. The US, currently still the country with most infections worldwide and the highest death toll, now also faces social uproar against racism after the killing of an African American by a white police officer.

Equity markets continued their recovery fueled by (even more) Central Bank money and fiscal impulses from governments. As for most companies’ earnings outlooks remain grim the P/E gap is widening, and the rally still seems to be merely based on expectations of a catch-up.

We´re in the first part of a Keynesian deal which given the circumstances is not much to be argued about. However, politicians do notoriously get flimsy about the second part. So, a reduction of sovereign debt levels when the economy is up again had not really happened after the last crises. This gives another bulky question mark looking at stock valuations and suspiciously low volatilities, which mostly have returned to pre-crises levels.

March Volatility risk newsletter - Silver lining or just a breather?

The world is still held in a headlock by the COVID-19 virus. Pushed by waning support from citizens and economic concerns some countries are taking first cautious steps into a state that might be called “post lock-down”. Other countries are still in full combat against the virus and in some cases, their political leaders get caught up by reality.

There is a plethora of argumentation around the measures and impact by decision-makers and experts involved, with virologists certainly being new on stage. It turns out not only economists find it hard to settle on consensus in their discipline. The only common agreement is that most countries will go into a (hopefully) short recession. This is what equity markets at least seem to believe as they have re-gained part of their losses for now. Probably with the help of central banks and governments who are aligned on “whatever it takes” measures.

If the ever-increasing sovereign debt levels and also potentially a rise in corporate/retail defaults persists, it might induce further systemic risk and the pressure on the banks might darken the picture again. Even though most asset classes are still in their high regimes, markets seem to anticipate a short-lasting economic impact.

Arkus update: COVID - 19

Dear Client/Supplier

Given the constantly evolving situation globally regarding Covid 19 and to ensure as much as possible the health and safety of its employees and continuity of business and services, Arkus Financial Services has taken the decision today to fully activate its Business Continuity Plan (“BCP”), and we are deploying all employees to work remotely from home with effect from Monday 16th March 2020 until further notice.

Due to robust BCP procedures already in place and recent conversations with our key service providers, we believe we have adequate measures in place and are confident that we can ensure continuity of services on a business as usual basis. In addition, it is important to outline that Arkus are fully compliant with the applicable data protection measures and are fully respective of the provisions in place.

March volatility risk newsletter - Black Swan

So, here we go. Markets turned into crisis mode as the Corona virus and oil price turmoil’s spurred fears of a global recession that sent markets south with a speed that we haven´t seen in decades. (Un-) surprisingly weak European bank books popped up as another prevalent concern. On the geopolitical end, the unsolved refugee crisis and tensions between Russia and EU/NATO surfaced again.

The landslide losses are of course accompanied by huge jumps in volatilities, VIX and VSTOX spiked to levels last seen during the Lehmann crisis. Yields of US and German Government bonds slumped to new record lows raising spreads to more indebted countries, notably Italy.

The FED reacted with a rate cut which has had little effect, other central banks don´t really have much firepower left, anyways. Consequently governments around the world are tying packages to help dampen the impact of all the troubles. The black swan has come around, let´s see how long it cares to stay.

Market volatility risk report - February 2020

Markets started the year lighter as the outbreak of the Corona virus and the impact on global production chains added to the list of concerns about the global economy. Equity volatility (and vovos) were picking up. Brexit finally happened on paper, but the agreed transitory period is still ongoing, so the blur continues. FX markets seem to have clear perspective on this as Sterling rallied against the Euro.
After the failed impeachment US president Trump seems to be sitting more firmly in the oval office than ever. Looks like trade wars and roaring on the political scene are bound to continue. Macron is facing continued domestic pressure for his reforms and Germany is preparing for the post Merkel era, so possibly not too much dynamics to be expected from a European perspective from the (now) two biggest economies of the European Union.
The Fed has moved back to QE-type of measures and unsurprisingly no change in monetary politics imminent for the ECB after Lagarde´s take over. If anything market participants can expect a more political orientation the Eurozone central bank than an economic one.

Re-domiciling or launching new funds across Europe in 2020?

Fund managers: in light of the recent election result, are you considering re-domiciling or launching new funds across Europe in 2020?

Market volatility risk report - January 2020

Equities continued to rally during the last month of the year, with only Europe picking up in terms of volatilities. Finally, there seems to be more clarity on Brexit with Boris Johnson winning the re-elections in the UK confirming his exit plan. Unsurprisingly €/£- volatility has moved up straight to the high regime.

Looking back 2019 has not been a bad year for most equity indices and despite several set-backs price levels are fairing higher than at the beginning of 2019. The corrections went along with several periods of higher volatilities, but those have not proven to be persistent so far. Consequently, volatilities were for most of them at or below the levels from the beginning of the year.

All in all local and global geopolitical tensions have not yet manifested themselves in concerns about economic perspectives. Or is it just the central banks still filling the punch bowl, after all? VIX and VSTOXX volatilities moved up to their high and medium regime indicating higher levels of uncertainty. (Note: Recent events between the US and Iran are not yet reflected in the data used for this report.)

Despite some dissonances, the concert continued and markets finished the year dovish. Let´s see for how long the music plays.

The Arkus team wishes you and your loved ones a healthy, happy and prosperous new year 2020!

Market risk report: December Edition

Recession fears were put aside recently with equity markets mostly in positive territory. This may have been caused by a perceived reduction in geopolitical risks, e.g. an easing likelihood for trade wars or quasi QE type of interventions from central banks. There are not too many reason for optimism at this stage with massive strikes in France in the wake of pension reforms, recurring threats of US president Trump to impose tariffs on various countries.

Powers have been redistributed in the EU, with Von der Leyen´s commission finally being accepted and Christine Lagarde incepted as president of the ECB. The latter not inspiring confidence about an uncoupling of the political influence over monetary decisions. In addition, France and Italy are still running high public debt levels and Brexiting Boris Johnson has triggered re-elections in the UK.

Looking at the data, this was mirrored by a further increase of tail risk and a continued divergence between implied and realized volatilities of European Equities. So even if equities levels were in positive territory there seems to be tension in the system that is bound to cause trouble.

New Majority Shareholder for Arkus Financial Services

Arkus Financial Services S.A., Luxembourg (Arkus) is pleased to announce that the Swiss Profidata Group AG (Profidata) has entered into an agreement with Independent Risk Monitoring Ltd, the London parent company of Arkus, to become its majority shareholder,

New performance contribution tool now available on RiskRadar

RiskRadar, our interactive risk monitoring platform, provides a numerical and visual breakdown of a portfolio’s performance contributions across various categories. The return contribution of price effects, foreign exchange, income distribution and fees are captured and can be analysed across multiple dimensions. The exposure and performance of each asset can also be analysed.

The latest deadline impacting the UK asset management industry is drawing near.

A UK authorised fund must now have a minimum of two independent non-executive directors on the board of its authorised fund manager (AFM) by 30th September 2019. This reflects similar requirements in Luxembourg and Ireland. Please find a link here for the final FCA rules and feedback paper. [Note: is this the most recent document from the FCA on this subject?]

IOSCO's statement on liquidity risk management for investment funds.

EFAMA welcomes IOSCO’s statement on Liquidity Risk Management for investment funds and calls for a consistent implementation of these recommendations by national regulators.

Lower for Longer, ever?

Financial markets breathed a sigh of relief in June on hopes that the US-China trade war could still be resolved and with both the Fed and ECB confirming their dovish tilt, likely extending the lifespan of the economic expansion.

Overall, market volatility came down considerably while equity markets pushed higher and, in some cases, reached all-time highs again. The largest impact was on fixed-income markets with investment grade and government debt priced significantly higher as risk-free yields reached new lows. Most notably, the US yield curve is increasingly inverted and the 10-year rate fell below 2%, the Swiss yield curve is now negative up to thirty years and the Germany 10-year yield fell below the ECB deposit rate of -0.40% for the first time.

So with equity up and bond yields down, we are back to asking ourselves which market is right? Bond markets appear to focus on falling inflation and lower economic growth forecasts while equity markets seem to discount the short-term risks and focus on the ability of central banks to extend the economic cycle with lower for longer interest rates, effectively making equities look attractive on a relative basis. In this narrative both markets can continue to perform well, the million-dollar question is for how long?

Arkus Article: The need for effective fund liquidity management

Recently, Mark Carney, Governor of the Bank of England, said that “investment funds have a structural mismatch between the frequency with........

Tariff Man

Global Equity markets fell sharply in May and closed out their worst month since December after trade negotiations between the US and China broke down completely. Developed equity markets finished down around 5%-8% as investors fled to the safety of US Treasuries and German Bunds posted an impressive gain of 2.2% and 1.8%, respectively. Markets are now pricing in more than 3 rate cuts by the Federal reserves by the end of 2020.

With geopolitical risk materializing and news flow on the state of the global economy mostly negative, markets are clearly in a “risk-off” mode. Still, the drop can so far only be labelled as a healthy correction and markets behaved orderly without any extreme spikes in volatility. How far will it go? That depends on if/how the trade war(s) will impact the real economy (i.e. growth and earnings) and to what extent central bank policy can mitigate this. The imbalance in risks and risk/reward asymmetry we observed in recent months are still there but are less pronounced now that central banks are turning more dovish. Can the expansion in valuation we saw in the first quarter continue and are more defensive portfolios still warranted?

Tightrope Walk

(Geo)political risk rose as global tensions grew with the US escalating trade war with China and more trouble likely in the Near East. The situation in Europe also hasn´t much improved over the last month as Brexit discussions are still in the air and uproar in France continues. Also, political inertia in Europe is imminent given the job rotations at European Top level and elections coming up. Global economic growth remains low while financial conditions are still loose. The economic slowdown in developed markets seems to continue and first negative market reactions have been observed, even though equity volatilities across the board remain in low regimes. Furthermore, equity prices were upward trending for most of April but posted a sharp drop at the beginning of May. We also observe an increasing divergence between realized and implied volatilities, which may be a sign of troubles ahead but could also be a hint that the data isn´t yet capturing increased uncertainty. Time will tell. Most of the volatilities of other asset classes were also contained in their low regimes.

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Last month can be characterized by more of the same. In short: global economic growth continues to stall; financial conditions remain loose and (geo) political risks are largely unchanged. All eyes remain focused on Brexit and US-China trade talks. Short-term volatility picked up somewhat but is still considered to be in a low-to-medium regime.
Risk assets saw rising valuations in March with the S&P 500 posting its best quarter since 2009 but momentum is slowing. The first signs of market turbulence occurred on Friday the 22nd of March with equity markets logging their worst day in recent months and implied volatility jumping ± 21%. The move appears driven by further disappointing economic data and an inversion of the yield curve as the spread between the 3-month Treasury Yield and 10-year Note Rate turned negative for the first time since 2007. It has since turned positive again. Historically, a yield curve inversion has been a useful (but not flawless) predictor of recessions. But this was before the ‘new normal’ of Quantitative Easing, so use at your own risk.
Is there still some breath left in this late phase of the business cycle? In our opinion there is but the path is narrowing and we remain convinced that risk is to the down-side.

Mixed signals

February has been almost eerily silent with little to no volatility driving events. In aggregate, news flow was marginally positive and has resulted in small but steady gains for risk assets. Short-term volatility was down across asset classes and can be considered low for historic standards. Headwinds from a stalling global growth outlook and disappointing growth in Europe appears to have been offset by more accommodative rhetoric from central banks (i.e. QT on pause), a positive economic growth surprise in the US and hopes of an imminent US-China trade deal. So while signals have clearly been mixed, the annualized performance of risk assets has been extraordinary and volatility has all but disappeared. A sign that smooth sailing lies ahead or that of growing complacency? We think it is the latter and that tail-risk is asymmetric to the down-side in the short to medium term.

Inflection

January has offered investors some respite as markets rallied and risk assets made up most of their losses in an almost V-shaped recovery. The Fed dovish rhetoric on both the future path of interest rates and the balance sheet reduction plan has quelled any fears of tighter monetary policy. This takes away a key headwind (for now), but the risk remains to the downside with global economic growth stalling and little relief on political uncertainty such as US-China Trade talks and Brexit. What was somewhat unusual is that bond markets rallied too. So, the market outlook appears to be mixed and nearing an inflection point. Where are we in the business cycle? Are we still in a late-cycle phase or are we entering an end-cycle phase? With QT on hold, the current expansion could be stretched and risk assets could continue to outperform, as they have done historically in late-stage cycles. In our view, something has got to give and we should prepare for a bumpy ride.

Just a Glitch?

The occasional earthquakes anticipated in our November newsletter came without much delay and hesitation. Global markets showed sharp declines with many markets down double digits. The US equity markets booked their worst year since the financial crisis and the worst December since the Great Depression. To illustrate, the S&P 500 index fell 9.2% during the month. It is not a surprise then that volatility, both realized and implied, spiked.
Investors looking for a silver lining might want to focus on the highly anticipated ‘Powell put’ that has gotten more traction. After hiking rates in mid-December, The Fed Chairman recently said that he was ‘listening very carefully’ to financial markets and would balance the steady flow of strong economic data against the potential of an array of risks. So far markets are not pricing in the anticipated two rate hikes in 2019 and markets even consider the Fed more like to cut rates instead. In our view, the recent change in risk appetite is there to stay and pausing the tightening of monetary policy is not likely to quell the current worries about global economic growth.
To reference president Donald Trump: just a ‘Glitch’? Unlikely.

Too Far into the Woods

Interesting times again, with growth expectations slowing, dovishness increasing, but many stocks still feeling toppy. A positive real yield on USD cash is the main thing to concentrate on to my mind.
Hope you all have a great Christmas.

Earthquakes

Another month of rising bond yields continued to put pressure on equity valuations. Three month US treasury bills (as about as risk free an asset as you can find) yielded more than core inflation in the US for the first time since 2007. In the intervening period investors in cash have been penalised 1.5-2% annually by inflation. Now, once again, investing in (USD) cash generates a positive real return.

This continues our theme of QE switching to QT; QE’s purpose was to force money out of risk-free assets (by reducing their yields and so making them less attractive) and into more risky assets. QT, definitionally, should do the opposite. As QT progresses, we should see the riskiest assets (high growth, but loss-making companies) sell off the most. There should be a movement of money from high growth equities to value equities (a reversal of a years-long trend) and finally into risk-free assets. We saw the beginnings of this process during October, but the tectonic plates of QT are likely to continue to drift, with occasional earthquakes.

3%

“If QE forced money out of risk-free assets into more risky assets, QT, definitionally, should do the opposite. With the US leading the cycle transition from QE to QT, risk-free assets are looking more and more attractive. Focusing on the 2 year bond as a measure of “risk-free” return, 3% is starting to look enticing. As QT progresses, we should see the riskiest assets become increasingly less attractive with a growing risk of a deep correction."

“The spread between US and German 2 year bond yields is at a post-1989 high. Since the late 1990’, whenever the spread has reached more than 2%, equity markets have subsequently sold off, and whenever it has gone negative, equity markets have subsequently rallied. With the spread now over 3.4%, we’re 2 years late for a sell-off, by this measure. Food for thought at least.”

Sugar Rush

Is the US equity market overheating?
Subdued volatility points to a certain complacency, however the current term structure of implied volatility indicates that the tail risk has considerably increased over the last few weeks and remains close to historical highs.

Imbalanced

A quiet month, perhaps unsurprisingly for the summer. August is shaping up to be more interesting, but that's for the next report!

Divergence

To add to the two mini-crises this year: the inverse VIX meltdown in February, and more recently the Italian potential-euro-exit in May, we can now add a bear market in Chinese equities. The last is easily ascribed to Donald Trump’s talk of a trade war, but probably too easily; it more likely has its roots in a cooling Chinese consumer. As we said last month, real negative news is actually negatively impacting asset prices (as it should, but didn’t, in 2017); we still see this as positive. What concerns us slightly more is that these incidents tend to be contained to small pockets of assets (VIX to equities, Italy to Italian bonds). What we haven’t seen since late 2015, is a broad-based sell-off, predicated e.g. on falling growth expectations (a la 2015/16), or simply just valuation (1999/2000).
We are also wary of the potential for a big carry trade emerging in euro/dollar, as economic growth and interest rate policies continue to diverge. At 2 year maturities, the spread between the two has progressively widened up to 3.2% now. Unhedged carry trades must be starting to look tempting, particularly as the dollar has rallied against the euro for most of this year. This process in itself can further strengthen the dollar. But ultimately when the trade gets too crowded and/or the yield differential narrows it can all reverse. One to watch.

Calmer waters

We’ve now seen two mini-crises this year: the inverse VIX meltdown in February, and more recently the Italian potential-euro-exit last month. We make two observations: first, in both cases real negative news actually negatively impacted asset prices, as it should, but didn’t in 2017. We take this as positive. Second, the impact was remarkably contained: in the first case almost entirely to equities, and in the second to Italian bonds and equities, and to a lesser extent the euro. What we haven’t seen this year, in fact haven’t seen since late 2015, is a broad-based sell-off, despite several potential causes (trade war, North Korea). We are a little more concerned by this: markets seem slightly too complacent to us.

As eurozone PMI’s and GDP estimates have eased recently, we could also expect a slower exit from QE by the ECB, which should remain supportive of asset prices. The US economy remains strong though, so we might expect to see increasing divergence in inflation and bond yields, and possibly an even stronger dollar. But overall we see less reason to expect higher volatility in the next month or so.

Creeping upwards

The 2Y keeps creeping upwards, but (other than EM countries) we haven't seen flows associated with it, yet.
One to watch.

Should we worry about the flattening of the yield curve?

It's still a much more interesting year from a volatility perspective at least than last year.
Watch the 2Y US bond yield! Cash is becoming more and more compelling an investment than risk assets...

Wake-up call

Last month we previewed the extraordinary impact of forcibly winding down inverse VIX strategies; a reminder here:
The S&P broke its record-breaking run, and markets have had a huge shake-out, much as we had been warning (possibly for too long?). The taking away of the punchbowl from the party (i.e. ending of QE) may have been too late to avoid a hangover. What happened? Our take is as follows. The average hourly earnings data surprised on the upside (we have been suggesting for some time that the very low levels of unemployment would eventually lead to wage inflation; we’ve just been surprised it’s taken this long). This led to a sell-off in markets, and a consequent spike in the VIX volatility index. Over the last few years shorting implied volatility has been a winning trade, as realised volatility has consistently run below implied for quite some time. As a result a large number of funds and strategies have been built on this trade. However as implied volatility spiked, there were large losses in this trade, which had a “negative gamma”, meaning the more markets fell the more the strategies needed to sell. Couple this with thin trading volumes late in the day and the result was a sharp sell-off, accompanied by unprecedented intra-day moves in the VIX index.
Although we still see the shock to (equity) markets as technically driven, we would still suggest that there has been a wake-up call, and markets are likely to be more sensitive to future inflation surprises. Cash, at least in USD, is looking increasingly less unattractive; the US 10 year government bond yield is now close to 3%, and the 1 year yields more than the S&P500. If labour markets remain so tight and economic growth strong, it seems unlikely to us that there won’t be further upside inflationary pressures, and eventually cash will look a better bet than risk assets. It feels we are getting closer to that tipping point.

EAM Conference

Meet us today and tomorrow at the EAM Conference !

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Taking away the punchbowl

It's almost out of date as soon as it was written! Although inflation expectations are still low, the US wage number spooked the markets and led to a feedback loop.
that technical trade is now mostly over. but it remains to be seen whether it's left a scar on investor sentiment.
It's like the old days again!

New Lecture on Risk Management at the University of Trier

For all the persons interested in having Risk Monitoring lecture, please join our COO, Martin Ewen, at the University of Trier.

A hard act to follow

2017 was a year of positive surprises. All major economies showed good, improving and synchronised growth, unemployment plummeted, but despite this inflation didn’t appear. Even politically almost everything went right.
2017 will be a hard act to follow, and 2018 is likely to be a more difficult year. But, as with 2017, the very benign economic backdrop combined with still subdued inflation could continue for some time, driving asset prices further up and keeping volatility low.
But at some point economies are likely to either get too hot (leading to rising inflation and/or rates) or cool (leading to lower corporate profits and rising defaults). Higher levels of volatility are very likely to return at some point in the next year.

Risk Monitoring for Asset Managers

New video aiming to introduce new functionalities on Risk Radar platform.

15th Anniversary - Arkus

New Year, new chances and fresh starts!
On behalf of the Arkus team we would like to wish you a Happy and Prosperous 2018.
At Arkus we are also happy to be celebrating our 15th Anniversary during 2018 ✨

All is calm, all is bright

The “Goldilocks” scenario continues: growth remains firm all around the world, but not so hot that inflation starts rising. Volatilities remained mostly low or medium, although they were slightly up on last month.
We still believe that investors for too long have become used to inflation and rate rises constantly undershooting estimates, and hence bond, and then equity, markets only going upwards. And we still see that the market has more and more similarities to both 2007 (good economic growth, rising markets, unusually low volatility and a hunt for yield) but also shades of 1999/2000 (a tech bubble). The times are good. But good times inevitably lead to complacency. How long it takes before the spell is broken remains to be seen.

But in the mean time, we wish you all a very merry Christmas and a calm and bright new year.

CSR in Risk Management Framework

The topic of Corporate Social Responsibility (CSR) increasingly impacts the board rooms of our clients. The idea of writing an article on CSR, when it was suggested, appealed tome as we continue to engage in dialogues to develop practical frameworks to apprehend these dimensions not only from a risk point of view, but also from a strategic one.

by Yves de Naurois

Season's Greetings 2018

Wishing you all the joys of the Holiday Season and a happy New Year.

Switzerland (Zurich and Geneva) Alfi Roadshow

See you tomorrow at the Alfi Roadshow in Switzerland!

As one of the main sponsors, Arkus team will be pleased to welcome you !

Risk Management : never say never

We all manage risk since the very beginning of humanity. In times past, risks were directly related to rewards that would enable an individual and the tribe to survive. Nowadays, the situation is roughly the same. People take risks, hopefully reasonable ones, for a reward and intuitively compare the respective levels of risks and rewards to assess whether it is worth taking the risk. It is in everyone’s nature to do so but hopefully tools can help people in general and specifically directors and executives of companies in the difficult exercise of risk management.

PE & RE Conference

Arkus will sponsor the PE & RE Conference, have a look on your badges ;) .

Arkus Focus November 2017

The year that was all set to see the return of volatility has continued to tease us. Volatility is stubbornly low, and in many cases at 12-month lows. (Implied volatility is comfortably higher, so it's expensive to hedge downside risk).
I'm more and more convinced downside risk is at similar levels to 2000 or even 2007, although the risks and mechanisms are different to either of those. But valuations are toppy, and many metrics stretched. Fascinating to watch though.

The “Risk Specialists"

New regulatory requirements aim to monitor and ultimately reduce risks for investors. For the past 14 years, Arkus Financial Services has been analyzing and mitigating those risks.

An interview with Christophe Pessault, Chief Executive Officer of the company.
Check out our last article!

Operational Risk: a promising exploration field

As with many risk related matters, operational risk is not a new notion nor a new practice. Identifying operational risks, their likelihood, their potential impact and assessing mitigation factors is a common practice across many industries particularly well illustrated in the energy or transportation sectors.
This practice is more recent in the financial sector. In that respect, banking and insurance sectors were pioneer, in particular following the Barings bankruptcy; investment management and fund industries followed.

For more details, click on the link!

Have a good reading

Arkus Focus October 2017

Newsflow was relatively light in September, with politics dominating but North Korea moving out of the spotlight. Continuing good economic growth and still no real signs of inflation proved positive for equities, slightly less so for bonds.
But Mark Carney’s warning that rate rises are coming should be seen as a warning sign. US and UK unemployment are at multi-decade lows, and eventually inflationary pressures will appear as per the historic Phillips Curve. Why they haven’t already is the real mystery. Investors for too long have become used to inflation and rate rises constantly undershooting estimates. The reversal of this could prove to be a large source of future volatility.

Arkus Focus September 2017

Atomic bomb tests and major hurricanes haven’t stopped the S&P500 making new all-time highs, and the VIX has not risen much above 10. Massive corporate deleverage “back to pre-87 levels” and low earning volatility cannot fully hide a very disparate situation with enough example of companies who have piled up debts on flat to declining cash flows, and not just in the oil sector; some valuations look much stretched.
Emerging market spreads have continued tightening while yields have resumed their decline, resulting in stellar performance and extraordinary inflows into the EM debt market. The continued “rush for yield” is raising concerns of increasing systemic risks, with additional pressure arising from large portion of the outstanding debt coming to maturity in the next 12 months.
In both cases indiscriminate allocation via passive investment and other ETF’s is hiding growing structural imbalances while central banks are very slowly starting to close the taps; wage inflation could accelerate the process .

Leading Edge Conference in London

Starting 3rd of October, Arkus will be one of the main sponsors at the next Leading Edge Conference in London!

Martin Ewen, Chief Operating Officer, will be one of the speakers and would be delighted to meet you on-site.

Arkus Focus August 2017

There are currently many parallels with the situation preceding the last financial crisis 10 years ago (record high stock markets, record low volatility, record consumer debt, record M&A, big current account deficits etc…). Banks and corporate balance sheets are clearly stronger, not a problem this time. But like in 2000, valuations of many stocks and bonds seem high. The catalyst for a sell-off is almost impossible to predict and of the few candidates lurking in the background, if one discards political skirmishing, our preferred one would be the record number of zombie corporates and that is at the current low level of interest rate.

Arkus Focus July 2017

Cracks appearing

Every day that passes feels more like 2007. Volatility is low, markets are high, global growth is strong, M&A and PE deals are high, as are house prices and debt levels; and cracks are certainly beginning to appear: witness the sell-off in bonds and tech stocks last month. Hopefully the bubble can be deflated rather than burst.

But there are positives: the relief rally on Macron’s success having moved out of our sample period, the modelled distribution of the eurozone equity market has returned to normal; coupled with the sharp drop in inter market correlation we are encouraged to think that the markets are behaving efficiently with a caution that was certainly not present in 2007 and signs that many fund managers are holding high levels of cash.

Arkus Focus June 2017

A new deal? Bye-bye old Europe, welcome version 2.0.

On the surface not much has changed since last month; volatilities are still surprisingly low, markets keep climbing and agitation around president Trump seems to only impact newspapers.
Markets are focused on the EC: the fear of a Frexit with a potential 2nd tour of the French election between the extreme right and the extreme left saw a 230% jump in expected volatility, followed by an extraordinary optimistic shift of expected return distribution, still persisting to date.
A new leadership is emerging , hope is in the air.

European Risk Management Conference

Starting 31st of May, Arkus will be one of the main sponsors at the next Alfi European Risk Management Conference!

Martin Ewen, Chief Operating Officer, will be one of the speakers at the European Risk Management Conference (in association with ALRiM) and would be delighted to meet you on-site.

Happy to welcome you at our stand.

Arkus Focus May 2017

Towards the end of last year we had a list of near-term events which had significant impact but mostly binary outcomes, as with the Brexit vote. These included the US election, Greek debt renegotiation, US debt ceiling and the French election. Whilst the outcomes haven’t always been as expected (see President Trump), without exception the market reaction for each has been positive for risk assets. Admittedly our worst fears for some of the alternatives weren’t met, but we do wonder about the reactions. Was so much downside priced in? Were the results really that surprising? Or was it that a lot of cash was sitting on the sidelines waiting for clarity? We sense the latter might be the most significant.
But we don’t think we are out of the woods yet. Quite the opposite. We are living in somewhat of a Goldilocks world: solid economic growth, record high corporate profitability, low unemployment and yet almost no signs of inflation. Can it really get any better? And remember who Goldilocks met.

Alfi London Cocktail & Conference

Starting 22nd of May, Arkus will be one of the main sponsors at the next London Conference !

Happy to welcome you at our stand !

Arkus Focus April 2017

The mood in the markets is far from complacent, indeed many are outright cautious at present. But valuations are high and the list of tail risks remains long. Economic growth remains good, but at some point volatility will return, and potentially lots of it. But as 2007 taught us, we might have to be patient.

Arkus Focus March 2017

Volatility changes were downwards again almost everywhere.
It’s a full 10 years on from 2007 when equity market volatility had all but disappeared. And the parallels don’t stop there: equity markets and debt to GDP have reached new highs, there is a “hunt for yield” and investment managers are missing volatility “target ranges” to the downside and have started asking us how to increase their volatility.
And yet in the face of this the list of tail risks remains long: US rate rises, French and German national elections, a possible post-Brexit breakup of the UK and/or EU, the ECB starting to taper, rising inflation in the UK and US, and further fallout from the lower oil price in oil producing countries as deficits remain high.
It seems very unlikely that volatility will remain so low for long.

The Risk Management Function under AIFMD for Private Equity funds

A year ago an association of risk professionals asked us to comment on the impact of the regulation on risk management practice within Private Equity Funds. Was it effective and was it meeting the needs of investors?

For more details, click on the link!

Have a good reading

Arkus Financial Services : The risk specialists

New regulatory requirements aim to monitor and ultimately reduce risks for investors.

For the past 14 years, Arkus Financial Services has been analyzing and mitigating those risks.

Quantitative Finance Symposium

Arkus' Satisfaction Survey - 2017

Event Paris - Hotel Hilton Paris Opera

Save the date: Event 21 Mars

Shortly, you could attend the new event organized by Arkus, Fuchs, FundGlobam and Mebs which will take place at the Hotel Hilton Paris Opéra,

The topic will be the following: L'internationalisation de la place de Paris : comment rendre les fonds des promoteurs français plus exportables ?

Arkus Financial Services : Le spécialiste du risque

Les nouvelles réglementations cherchent à réduire les risques des investisseurs. Arkus s’est spécialisé dans l’analyse de ces risques et leur prévention depuis 13 ans.
Une interview de Christophe Pessault, CEO de la société.

Arkus Focus February 2017

The list of tail risks remains long: French and German national elections, a possible post-Brexit breakup of the UK and/or EU, US rate rises, the ECB starting to taper, rising inflation in the UK and US, and further fallout from the lower oil price in oil producing countries as deficits remain high. And valuations are very high with a Chinese debt bubble, a tech bubble and record high equity markets and near-record high bond markets. Normally these two lists together would lead to high volatility, or at least high implied volatility (which in fairness is well above realised now). And yet we have seen neither in the markets, almost as if central bank intervention, or even the prospect of it, continues to squash volatility out of markets? It’s been suspiciously quiet.

The Challenge of Investment Managers

New video aiming to introduce Arkus services !

Risk Measurement in Practice

Monday 6th of February,

Martin Ewen, COO of Arkus Financial Services, will give a lecture to the University of Trier.

Arkus Focus January 2017

We start the new year looking at much firmer economic growth and with markets having weathered Brexit, the US elections, a Fed rate rise and the Italian banking crisis. But the list of tail risks remains long: French and German national elections, a possible post-Brexit breakup of the UK and/or EU, US rate rises, the ECB starting to taper, the Chinese debt bubble, a tech bubble, rising inflation in the UK and US, and further fallout from the lower oil price in oil producing countries as deficits remain high. And valuations are very high, and most people have a rational fear of heights. We’re all set for an interesting year!

Arkus Focus December 2016

2016 has been an unpredictable and tumultuous year, with sub-$30 oil, Brexit and Trump to name but a few. We think everyone deserves a break; wishing you all a very merry Christmas and a prosperous new year.

Arkus Season's Greetings - 2017

Best wishes for 2017!

NOSCE TE IPSUM - DO YOU KNOW YOUR LIMITS?

Following the recent publication of the CSSF Annual Report 2015 (currently only available in French), we would like to attract your attention to their comments regarding UCITS’ risk profiles.

Arkus Focus November 2016

Low volatility last month took me a bit by surprise given all the things that could have gone wrong. I put it down to a "presidential pause".
The central banks are keeping the plates spinning, but at some point one is going to drop.

Arkus Focus Octobre 2016

There is a long list of potential things that could cause vol to spike in Q4, "President Trump" being just one. But will the central banks be able to ride to the rescue?

Alfi Leading Edge Conference London

Starting the next 12th of October, Arkus will be one of the main sponsors at the next Alfi Leading Edge Conference London!

Arkus Focus September 2016

It was quiet in August, even compared to most Augusts. The VIX got close to multi-year lows. Maybe a combination of central banks squeezing all the vol out of markets and also a lot of people taking time off?
It's beginning to get more interesting in September. Hopefully not too interesting!

Arkus Focus August 2016

So last month saw the calm after the Brexit storm.
I'm still concerned about how much central banks are distorting markets. How long can it go on for? And what happens when it stops? Might yesterday's failed BoE QE purchase programme be the first sign of a trouble ahead? Interesting times, as ever.

Arkus Focus July 2016

Brexit dominates the news of course, as it does every dinner party conversation. It's interesting to see how surprised the London elite are at their apparent misunderstanding of the rest of the UK. We're a very divided country, and those divisions have now been made clear.

Event Genève - Hotel Kempiski 28 juin 2016

Arkus Focus June 2016

Realised and expected volatilities continued their lower trend ahead of the ECB’s Corporate Sector Purchase Programme which has been added to the Asset Purchase Programme. Surprisingly or perhaps not so unsurprisingly given the Fed hinted rate rise and the UK votes on the EU referendum in late June, some nervousness is creeping back in the market as the realised volatilities ratio has left neutral territory and the recent distribution of equity returns displays some renewed excess kurtosis.

Arkus Focus May2016

There’s not really much to say this month: market moves (ex-Japan) were small and although there was plenty of newsflow markets are quiet. The FTSE is currently tracking for its third consecutive down year, and I think a lot of people in the UK are sitting on their hands waiting for the EU referendum. I'd be very interested to hear your thoughts on the EU debate.

Alfi & Alrim European Risk Management Conference

Starting the next 26th of May, Arkus will be one of the main sponsors at the next ALFI & ALRIM European Risk Management Conference!

Fund Factory Magazine - The Virtuous Circle

FUND FACTORY aims to create synergy with actors of the same size, experts in their own domain: Distribution, Risk, Governance and Management. In this first issue, you will discover articles written by experts and read about recent developments in our profession.

Distribution et gestion cross-border des fonds d'investissement

Mardi 28 juin 2016, de 8h00-12h00.

Petit-déjeuner de travail

Grand Hôtel Kempinski, Genève.

Risk Measurement in Practice

Monday 23th of May

Martin Ewen, COO of Arkus Financial Services, will give a lecture to the University of Trier.

What does it involve? How do you calculate VaR? σ?

Arkus Focus April 2016

The market environment absorbed the initial shocks observed beginning of the year and now shows a general declining in volatility during the month of April.The declining trend in excess kurtosis and implied volatility is to be assessed versus a background of declining corporate profits, stretched valuation and rising corporate defaults. Accommodating monetary policy can only go on so far and there is little room left for maneuver.

Could we be approaching a perfect storm?

Arkus Focus March 2016

Now that oil has found a floor we're back in more fundamental-driven territory. Not that that might reduce volatility. The moves into negative rate territory may have unintended and unforecasted implications. Interesting times, as ever!

Arkus Focus February 2016

It's clearly been a tough time for everyone, unless you're in government bonds.

I see the big driver as slowing china, falling commodities prices, SWF outflows. Market feel VERY flow-driven, with big moves happening gradually over the day with no clear micro or macro events in the price charts.February has so far been a continuation of January, with the added fun of banks facing both falling NIM due to negative deposit rates and higher provisioning should there be further economic slowdown.

Arkus Focus January 2016

We had discussed before how the impact of falling oil and commodity prices hadn’t yet appeared to stress the system as much as it might. We still think that is the case and we are now seeing what is to my mind a combination of a stronger dollar pressuring EM countries whilst simultaneously seeing a regime change in commodities leading to seismic shifts in global current accounts with all the economic and political impact that will entail. Interesting times indeed.

Arkus Focus December 2015

Volatility changes were slightly downwards. Volatilities are now low or medium for all asset classes.

We suggested last month that the market might try one more time to spook the Fed into a(nother) postponement. As of the time of writing the markets are down somewhat, but the high volatilities seen in previous “taper tantrums” have not (yet) materialised.

Case study: Luxembourg-based regulated ManCo, part of one of the leading financial advisors & asset managers in the Nordic region.

We recently assisted this client by supporting the in-house permanent risk management function (PRMF) further formalize its framework of operations to adapt to new regulation and investors’ demand for independent risk monitoring.

Learn how we did it and contact us if you think this solution could apply to you or for a free assessment of how you can improve your risk-based governance.

Case study: British multinational banking and financial services company headquartered in London

We recently assisted this client by providing UCITS compliant risk monitoring system for a large number of portfolios distributed among several fund administrations pursuing a wide range of strategies for tradable assets.

Learn how we did it and contact us if you think this solution could apply to you or for a free assessment of how you can improve your risk-based governance.

Arkus Focus November 2015

Interest rate lift-off seems to keep approaching, the markets panic and then the lift-off can gets kicked down the road again. Surely this pattern can only go on for so long?" Looks like the Fed have dared the markets to misbehave before the mid-December meeting. That, we think, will be the big focus over the next 4 weeks. Unless something big and unexpected happens...

Arkus Focus October 2015

Interesting times, as ever it seems these days. Interest rate lift-off seems to keep approaching, the markets panic and then the lift-off can gets kicked down the road again. Surely this pattern can only go on for so long?

Quantitative Finance Symposium

Arkus is proud to sponsor the first Quantitative Finance Symposium “QuattroPole++” at Trier University, October 13th, 2015.

Arkus Focus September 2015

We had many price moves similar to 2008. What happens next? We think the recent gyrations were more about the Fed liftoff (rather than China directly) and effectively were a taper tantrum mk2. If that's right then at some point we will see some more turbulence.
Please see attached the latest volatility report for a more in-depth discussion.

Arkus Focus August 2015

It's clearly been a bumpy ride with the Greek drama, but that's now (temporarily, again) over, so we suspect we'll have a quiet month or two for now. After that we're getting oh-so-close to the first US rate rise, and that, coupled with some very weak macro data out of China (not to mention Brazil and Russia) is likely to make the road a little bumpier.

Arkus Focus July 2015

The seemingly rapid rise of the VSTOXX from 20 to 32, remains far away from previous bursts of 2009 (22-71) or Sep 2011 (21-54), giving apparent credit to politicians’ faith in the “Eurozone firewall” ability to hold against contagion.

Will our attention be attracted elsewhere as we are getting ever closer to a likely September rate rise in the US?

Luxembourg séduit les promoteurs suisses - Article et photos

Quelles opportunités pour la distribution et la gestion transfrontalière de fonds alternatifs?

Arkus Focus June 2015

Is it really Greece driving the markets, or are we really seeing the beginnings of the end of QE-inflated assets? Either way it makes for interesting watching both in bonds and equities...

Arkus Focus May 2015

Last month was relatively event-free. It looks like the stress might be beginning to build for this month instead: first in bunds and last night in US treasuries. But the very weak US GDP print suggests the "day of reckoning" has been pushed further out, again.

Arkus Focus April 2015

April proved to be an even quieter month than the prior one, probably in part due to the run-up to Easter. The big stories again were central bank related. The ECB has pushed German 10 year bonds down to -15bp (and 2Y down to -28bp) as this is written, and the Fed opened the window for rate rises. The market either doesn't seem to believe the Fed will raise rates, or if it does it won't matter. It's quite likely to turn out to be wrong on both counts.

P.S. as an aside, everybody we speak to wants yield, and doesn't seem to care how they get it. It's VERY reminiscent of 2006/07.

European Risk Management Conference - Highlights and photos

Tuesday 19/05/2015
Chamber of Commerce, Kirchberg, Luxembourg

Did you miss the ALFI/ALRiM European Risk Management Conference? Check out the highlights and photos here.

Operational Real Estate, PERE & Debt Fund Management Conference

Wednesday 27/05/2015
Parc Plaza - Central Luxembourg

The 11th Annual Real Estate Fund Servicing Conference - Operational Real Estate, PERE & Debt Fund Management

Risk Assessing, Monitoring & Reporting under AIFMD to Regulators & Investors

Case study: Major French-based private equity house investing globally

We recently assisted this client build a new independent permanent risk management function (PRMF) and operate it on an ongoing basis.

Learn how we did it and contact us if you think this solution could apply to you or for a free assessment of how you can improve your risk-based governance.

Case study: German-based renewable energy player

We recently supported a German-based client, active in the field of renewable energy, to set up the foundations of its risk management framework right from the beginning. Learn how we did it and contact us if you think this solution could apply to you or for a free assessment of how you can improve your risk-based governance.

Case study: Canadian full-service Real Estate investment firm, focused on PERE funds

Arkus Financial Services designed and implemented a toolkit tailored to the client’s real estate business and already formalized operations in North America. The goal was to assist the client comply with the AIFM Directive, delegated regulations and Luxembourg‘s best practices in relation to compliance matters whilst limiting redundancy of controls already performed and documented within the organization.

Learn how we did it and contact us if you think this solution could apply to you or for a free assessment of how you can improve your risk-based governance.

Case study: ManCo of a Scandinavian based independent asset manager

Arkus Financial services designed a two-hour training delivered by an independent director to independent directors. Learn how we helped board members:

- Understand the regulatory framework relevant to both UCITS and AIFs/AIFMs;

- Learn about the key requirements applicable to both with a particular focus on the Luxembourg context;

- Share practical feedback and insights from a practitioner on key features/pitfalls of the risk management process, risk profile and SRRI.

Do not hesitate to contact us if you think this solution could apply to you or for a free assessment of how you can improve your risk-based governance.

Arkus Focus March 2015

A much quieter month. But now we have two big forces pulling in opposite directions: the ECB trying to buy a very limited and very sticky supply of sovereigns (hence German 10Y at 20bp, vs Japan at 40bp...) and the US getting the markets ready for the start of tightening. It should be fun to watch.

New interactive training available

Our latest interactive training on risk management is now available – Instructor : seasoned risk professional with practical experience as a permanent risk management function for both UCITS and AIFMs.

Arkus Focus February 2015

Volatility trends were in general upwards during January. Almost every asset had High volatility relative to their 12-month averages. The big news was all in Europe: QE, Swiss Franc and Greece. At least high volatilities seemed justified for a change.

Latest Private Equity/Real Estate presentation

Click here to view our latest presentation on services we offer for Private Equity/Real Estate.

Arkus Focus January 2015

Clearly oil was the big news in December (and continues to be so now).
I'm still surprised we haven't seen any collateral fallout. Maybe it's just a matter of time?

Arkus Focus December 2014

It was a bit "back to normal" last month, at least compared to the bumpy ride of October. Volatility was in general low, but any exposure to either Japanese assets or oil-related assets could have led to big price swings and high volatilities. You could have been very right or very wrong last month, and not being aware of portfolio biases could have been costly. Another lesson for risk managers! Anyway, here's wishing you a very merry Christmas and a prosperous New Year.

Arkus Focus November 2014

Volatility is certainly back!

We saw some pretty dramatic price moves over the last 30 days. It feels something big being forcibly wound up: big, sharp moves, often intra-day with little real news driving it and still no indication as to what it may be or whether it is just a flare of money flow. We may yet find out. We mentioned last month the sharp fall in oil hurting someone. So far the only big hit has been the Russian ruble. But we may well see more fallout if it stays at these levels or falls further.

Risk measurement in practice

What does it involve? How do you calculate VaR? σ?

Find out here

Arkus Focus October 2014

After a very quiet summer, risk has returned. Unfortunately, as is often the case with rising risk, it is being accompanied by sharp sell-offs. In this case in equities, high yield and commodities (and any currency not the dollar).

The silver lining is that firstly this will be positive for economic growth (of which there is increasingly little in Europe) and secondly people are now starting to be rewarded for risk. The "hunt for yield" (a la 2006) is probably over for a bit.

A possible negative is that the falls are deflationary. And Europe doesn't need more deflation.

Oil is particularly interesting as at below 90, it's fallen to such a low level so quickly that something will have to give. It could be an over-leveraged oligarch, or we could see another popular revolution in a country that relies on oil/gas revenues as it has to cut budgets. Hopefully more the former than the latter.

Also, the big thing that might happen with a falling oil price could well be - and is even likely to be - a default by Venezuela.