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The Biggest Puzzle: Understanding Business Cycles

October 2017 -

The global economy is stronger than many would have expected. For the first time in a decade, all 45 countries tracked by the OECD are expected to grow in 2017. Currency markets move in response to expectations of tightening by central bankers responding to growth, while the central banks adjust their guidance to alleviate concerns. Confidence is high. In the U.S., we are now in the ninth year of slow but steady increases in GDP, which begs the questions when will the downturn begin, and how steep will it be? The pattern of growth and decline of the economy is called the business cycle and it is the central puzzle in economics, challenging micro and macro economists alike. In her latest research, Rock Creek's resident Senior Advisor Jessica Einhorn reviews the history of both theory and data on the business cycle.
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Reconsidering Inflation

November 2016 -

In a world where deflation haunts us, and interest rates are negative for trillions of dollars of assets in Europe and Japan, what role can and should monetary policy play?
Rock Creek’s resident Senior Advisor, Jessica Einhorn, explores this question in her latest research, which brings her to the conclusion that despite all the expertise and arcana that makes monetary policy seem like an esoteric club for those in the know, in fact, monetary policy today rests on conjectures regarding unknowables.
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De-Risking Pension Funds in a Low-Yield Environment

November 2015 -

In today's low interest-rate environment, with the likelihood of higher future interest rates on the horizon, we have evaluated portfolio allocations that seek to decrease pension fund liabilities. Our analysis concludes:
1. In the current yield environment, there are better ways for pension funds to de-risk their portfolios than through liability-driven investments (LDI).
2. Since yields are low and likely to rise in the future, absolute return strategies are better suited to de-risk pension portfolios.
3. Pension plans using absolute return strategies would potentially have higher expected funded ratios and similar downside risks to pension plans using LDI-based strategies. Full details >
Corporate Finance: The Emerging Agenda

October 2015 -

The role of corporate taxes in economic policy has come to the fore as a campaign issue in the 2016 presidential election. In her latest research paper, Rock Creek’s resident Senior Advisor Jessica Einhorn examines the arguments for and against corporate taxes and addresses how, after decades of an almost singular focus on the share price as a metric of success, the public company is being called upon to broaden its agenda to focus on longer-term trends and a broader group of stakeholders. Full details >
Understanding the Challenges of Structural Unemployment

January 2015 -

The issues of structural unemployment are intertwined and often lead to a focus on income inequality. But, stepping back, we need to first understand structural unemployment in the US - what is it, does it exist, and what are the remedies? In this paper, Rock Creek's resident Senior Adviser Jessica Einhorn explores the answers to these questions and assesses the economic challenges posed by structural unemployment. Full details >
Do Hedge Funds Add Value in Pension Portfolios?

January 2013 -

Alternatives in general and hedge funds in particular, offer an attractive complement to the traditional 60/40 asset allocation framework used by many pension plans. The analysis in this paper has shown that a carefully constructed hedge fund portfolio can outperform the 60/40 strategy benchmark over time, even as it protects the portfolio against capital drawdown. The key, we believe, is making sure that the hedge fund portfolio has a 60/40 allocation as its benchmark and outperforms it in a consistent manner. It should not be surprising, that this approach is becoming increasingly more common among the more sophisticated pension. Full details >
Return Expectations for Relative Value Investments

March 2012 -

In theory, relative value investments should make steady returns regardless of the state of the underlying markets. In practice, the returns from these investments tend to be volatile although their returns do appear to be independent of the direction of the underlying markets. This raises two obvious questions; the first related to identifying the determinants of relative value strategy returns; and the second to the appropriate timing of investments in this strategy. Full details >
Diversification Strategies for Equity-Dominant Portfolios

February 2012 -

Over the last five years markets have faced crises affecting portfolios in a way not predicted by financial models: Correlations across risky assets converged to one. In this paper, we explore a promising new approach to diversification: using "Realized equity volatility," or "REV". Our research indicates that it is possible to cost-effectively generate return streams that are highly correlated with REV using liquid, tradable instruments. Full details >
Country and Sector Factors in Emerging Markets

June 2011 -

Traditionally, in emerging markets, the focus had been on country selection, as opposed to the more developed economies for which the sector selection has played a more important role. It would appear that in a more integrated global economy, sector selection should become increasingly important. This paper investigates the importance of country-specific and sector-specific factors on the public equity returns in seven large emerging markets during the past 7 years. Full details >
Hierarchical Cluster Analysis on the Hedge Funds

December 2010 -

The Rock Creek Group uses agglomerative hierarchical cluster analysis to identify how similar or dissimilar hedge fund managers are from one another. This assists with constructing hedge fund of funds portfolios that are well diversified and appropriate for exploiting market opportunities. Full details >
Mutual Information Correlation

December 2009 -

The Pearson correlation coefficient is a widely used measure of the correlation between two variables. However, it has its shortcomings. We propose another statistic, the RCG mutual information correlation coefficient, which is independent of the relationship between the variables. This measure is related to the entropy of the information. Full details >
Advanced Statistics in Rock Creek Analysis

December 2009 -

This note provides a brief overview of a few of the advanced statistical measures used by The Rock Creek Group in managing hedge fund portfolios. More detailed information on these and other statistical measures are also available. We propose updating this paper on an ongoing basis with information on additional statistical measures. Full details >
Advanced Risk and Performance Measures

May 2009 -

Hedge funds tend to use investment tools with non-linear payoff and as such their return distribution are non Gaussian. For this reason traditional risk measures are inadequate, as indeed are risk adjusted performance measures such as Sharpe ratios that may be more easily manipulated. Moreover, traditional risk measures tend to be highly correlated with one another, and as such using a number of these measures does not provide additional insight into the riskiness of portfolios. This note studies alternative risk measures that tend to be less correlated with traditional risk measures and which are more appropriate for non-Gaussian distributions. Full details >