Slugging percentage investing in bonds

Mispricing has proliferated amid increasingly fractured liquidity in the market since the global financial crisis. One regulatory offshoot of the financial crisis was to reduce the role of banks as warehousers of risk. This has meant mispricing in the market is not necessarily smoothed out or rectified as it was in the past. From a timing perspective, market trends indicate that certain convex strategies can be positioned for very favourable outcomes in the event of particular dislocations, with the cost of running these strategies being very low.

There are fewer players presently in the market such as proprietary desks, while bond dealer inventory has plummeted and weaker competitors exited after In addition, the market structure is also biased. Many participants are tilted heavily towards a long bias, and yield investors tend to distort prices when rates are very low.

As a result it is possible to build strategies that seek to benefit from potential liquidity traps in the credit market, or outsized returns in market sell-offs while paying very little to run them. Decompression trades Decompression trades are a simple example of a cheap convexity strategy that can be put in place as a result of risk premiums compressing and overall complacency in markets.

In these situations, being long high-quality assets and shorting low-quality assets creates an attractive, convex trade. The downside is limited because the high-quality assets are unlikely to trade through low-quality assets, yet as the market sells off, the low-quality assets will likely underperform the high-quality assets significantly. This creates a positively convex profile that stands to gain more than it stands to lose. Overcoming barriers to entry Harvesting such opportunities requires specialists to overcome the ample barriers to entry.

Requirements include a flexible investment mandate, broad investment expertise both across asset classes and within asset classes, expensive systems, and somewhat nimble capital. Such requirements complement perfectly some of the mandates of our Alternatives platform. Our team is focused on managers who are deeply proficient in convexity-driven investing and we have the infrastructure and governance in place.

The platform prioritizes an institutional framework, with the ability to onboard strategies that face little competition but rife opportunities for specialists. A bespoke approach to exploiting mispricing, we believe, is one way to achieve a high slugging percentage.

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This document is provided for information purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful.

This material does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Russian president Vladimir Putin is actively engaged in economic warfare with the West. To be clear, he does not control global inflation but he is a malevolent influence upon it.

Whether the economy is already technically in recession to an extent misses the point For policymakers, constraining the money supply, containing expenditure and curbing the rate of economic activity are the essential ingredients to control inflation. Interest rates are not precision instruments, they are more in the way of blunt tools. What is the evidence so far that US interest rates, pushed up from zero to 2. US economy is slowing Second-quarter economic growth data released in July points to a demonstrable slowing as real earnings fail to keep pace with accelerating prices and consumers and businesses tighten their belts.

The US economy shrank by 0. Two consecutive quarters of economic decline is the popular definition of a technical recession. However, here it is a case of pick your data to suit your case , those who claim the economy is still in good shape and growing will point to the comparisons with a year ago, which show that, in the second quarter, growth was 1. Whether the economy is already technically in recession to an extent misses the point: whichever data one chooses, either way the indicators are that economic momentum is losing steam.

The concern is whether continued Fed aggression really does tip the US into an unequivocal recession.

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The holy grail. What many sometimes fail to appreciate is that as investors, we won't just make a few poor investments, we're likely to make many poor investments despite smart reasoning and shrewd judgment. That's just the nature of investing and hence why this sport, like baseball, requires humility. You're guaranteed to strike out sometimes at the plate. But on the whole, the idea is that your winners should massively outperform your losers. If I'm right, how big could this be?

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All investments involve risk and the past performance of a security or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing. The price of a given security may increase or decrease based on market conditions and customers may lose money, including their original investment.

Titan newsletters are curated digests of business news stories delivered daily. Titan newsletter's goal is to make business and financial news accessible to all. The Titan newsletter team has editorial independence. But what matters more is how much money those winners make compared to how much the losers lose. In other words, your slugging percentage ultimately determines how successful you are at investing.

A high slugging percentage can also make up for a lower success rate. Bill Miller made this point clear in a interview: What Earl Weaver said is that more games are won on three-run homers than on sacrifice bunts. I think that is right. Most people look for a high batting average — high frequency of being right. As a result, they focus on how often they are right and not on how much money they make when they are right. They might make 10 — 20 percent when they are right. Mathematically, if they make one significant error, it will offset a lot of instances where they were right.

We focus not on our batting average, to continue the baseball metaphor, but on our slugging percentage. So, if we have a few investments where we make 5 or 10 times your money — or as we did in Dell and AOL, 50 times your money — that pays for a lot of mistakes. It pays for a lot of misses of 10 percent or 20 percent. Now, there is nothing wrong with trying for doubles and singles in investing. Old school Ben Graham style strategies are the epitome of a low slugging percentage strategy that works so long as you keep price and valuation front of mind with every decision to limit costly losses.

But it comes with the downside of needing to swing more often. Index investing is another example of a low slugging percentage strategy that works. The upside is that you only have to swing once on the index fund and the fund does the rest of the swinging for you.

On the other hand, strategies that chase a higher slugging percentage might make up for larger losses but likely deal with more frequent losses too. Venture capital is the epitome of a high slugging percentage strategy. In fact, one or two enormous winners are all it takes to offset all the losers to make a venture capital firm successful. But to do that, you need to find the next Amazon or Google or Facebook at its inception.

Of course, there are ways to earn a higher slugging percentage without taking risks like a VC. Here are just a few: Time. Even holding an investment that earns a modest annual return for years will naturally boost the average of your winners. A longer holding period also removes the problem of needing to find another winner that comes with selling too often.

Risk Management.

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