I just read something from a TD Asset Management letter where one of their US-based fund managers said the following:

A major step towards resolution occurred with the formal insolvency of Lehman Brothers and the potential of Merrill Lynch. While being rumoured for some time, these events are still sad and shocking for anyone in the investment business. But in relation to the markets, despair is a healthier phase than denial. For much of the past 18 months, we had been concerned that most financial companies and federal officials were acting as if the problem of too much debt could be solved with more debt which meant that loans just needed to be restructured so everyone could hold onto the assets they could not afford or accurately value. While we do not believe the credit crisis is over – given that there may be more global write-offs – we do believe the process of capitulation and healing has begun..  Paul Ehrlichman, Chairman & CIO, Global Currents Investment Management

That’s a broad title that can lead in so many directions.

The world today looks like we’re heading towards another two super-power situation.  Consider economic and political influence, voting on the UN security council, acquisition of oil, the space race, and even the medal count at the coming Olympics … There are a lot of themes that demonstrate the power of China, even relative to the US, and perhaps that’s one of several reasons why China is attracting plenty of foreign investment.

In May 2007, I put up two posts on this blog related to uranium.  The first was “Uranium Mania”,which discussed the astronomical price chart for uranium prices. 

One of the easiest ways to gain exposure to the commodity price, as opposed to the producers, is via Uranium Participation Corp [U].  Interesting how that post was written very close to the peak of uranium prices.

A couple of weeks ago, I was invited by the guys at “The Market Traders” to join in on their weekly roundtable podcast as one of three guest panelists.  If you check out their site, you’ll see that they’re big on commodities.  Possibly a bit more of a speculative bent to their site with ads that make me think that it’s a place where stock pickers come to congregate.  However, I was surprised to find that I wasn’t the only one commenting on ETFs and my fellow panelists didn’t really spend a lot of time discussing specific stocks although a few ETFs were mentioned (not just by me).

We basically comment three times:  Once on energy, the second time on the US dollar and finally with thoughts on areas of the market that we like.  Some who have followed my writings and have become accustomed to the way I do things might be a bit surprised by my final comments.  I basically state in explicit terms how I don’t believe now is a time to think like a traditional asset allocator.  I don’t think now is the time to stick to the “60%-equity/40%-fixed income” strategic asset allocation model.  Frankly, to have a “buy-hold” mentality all of the time requires a stomach of immense fortitude.  (What you are hearing now are people from Vanguard and DFA squirming in their chairs.)  Does that mean I’m leaning towards market timing?  On the spectrum, I don’t think I’m at the far end which is market timing, but I’m certainly not at the buy-hold end.  I’d like to think that the “strategic asset allocation” process which I think is so important (cool with that Vanguard/DFA?) should, in this environment as well as others, be allowed to deviate in two ways:

I’m surprised that it’s only now that we’re starting to hear the term “contagion” used more often in the financial press about the current predicament seen globally and especially in the US.

Over the past couple of years, I’ve mentioned in passing to different people my concerns regarding the economic outlook of the US. The way I see it, the typical American consumer (”super consumer” may be more appropriate) who is feeling the noose tighten from their mortgage obligations could soon make decisions that would have an effect on other forms of credit.

Just got back from yet another conference and, no surprise, it covered the current hot topic: commodities.

I keep telling myself, and the occasional inquirer, that I’ll get back into serious blogging … or at least publish at a pace similar to when I started back in 2006. Clearly, you will have noticed that that ain’t happening. One of the things that has kept me busier in recent times has been conference speaking. Just earlier this May I was at Connex International’s Public & Private Wealth Group Forum, an institutionally focused event with both a pension track as well as an endowment/foundation track.

To no surprise, there was a lot of content revolving around the use of alternative investments of all sorts, but especially hedge funds. I was most interested in discussions related to emerging markets as, to me at least, it seems like this is an area where in the longer term there would be a fair assumption for double digit returns unlike other broad asset classes and strategies. The downside, of course, is the volatility, but for long-term oriented institutions, that shouldn’t be a problem given appropriate diversification and risk budgets.

ROUNDTABLE: THE SEISMIC SHIFT FROM BETA TO ALPHA

Previously, the onus to generate Alpha was squarely on the shoulders of the advisor as he utilized the Beta products the industry provided. Now the industry is prepared to shoulder the burden as evidenced by the amount of actively managed ETFs in development.

Richard C. Kang is the blogger behind The Beta Brief (TheBetaBrief.com). He has been active in both institutional and individual asset/risk management for over twelve years with extensive experience in multi-asset-class mandates as well as strategies applying the use of passive instruments. Recently, he spoke with IndexUniverse.com assistant editor Heather Bell.

Index Universe [IU]: What is The Beta Brief?

My continued lack … well, maybe a better word is reduction … in blogging has been compensated by increased conference speaking. Aside from the event in Singapore I participated in last week, the other recent big ETF event was the “Inside ETFs” conference in Palm Beach Gardens Florida in January. The organizers of that event are a multi-armed entity called Index Publications LLC who publish the ETFR (Exchange Traded Fund Report) and the Journal of Indexes. Index Universe is their online portal and, in my opinion, along with the published work of Deborah Fuhr at Morgan Stanley provide pretty much all there is to know about indexing and ETFs on this planet.

I know that I’m keeping up with these experts after having bumped into Jim Wiandt (President of Index Publications and Publisher of IndexUniverse.com) in an event last year in Hong Kong. I’ve seen Deb Fuhr at basically every ETF related conference I’ve been to in the past year including the one in Singapore and we’re both speaking at an emerging markets derivative/indexing conference next week in London that should be very interesting as there’s great debate these days of the merit of investing in the developing world given the global market turmoil.

Lehman Brothers (LEH) have now entered the ETF fray (actually, their product line up contains exchange traded notes) and they’re branded as Opta ETNs. Well this is an interesting development and one that I don’t find very surprising.

Let’s think about the ETF industry for a minute (I am aggregating ETNs and any other derivative of this type of instrument … no not that derivative … into the term “ETF”). Are we moving more and more towards alternative asset classes? Are we adding sexier functionality to products? Are actively managed ETFs on the horizon? The answer to these questions is not just “yes” but we’re basically there. If the ETF industry is less about beta and more towards something else … some alternative or exotic or “non-standard” beta and even possibly (wow!) alpha then watch out. Investment banks are going to jump in and then some.

A little over a year ago is when I really started getting out to industry conferences as a speaker. I had done a few here-and-there in 2005 and 2006 but nothing like now. I suppose that as a blogger, albeit a part-time blogger at best, conferences have become a logical next step on this particular tangent in my career focusing more on investing management from a “media outlet” point of view rather than a practitioner’s. Truthfully, I never saw any distinction between the two and I’ve always hoped what differentiated me from others is my past and present work as a professional market participant. The same can be said for guys like Roger Nusbaum, Tom Lydon and Barry Ritholtz to name a few … I’d consider myself very lucky to be compared with any of these guys.

More importantly, I strongly believe that writing down the thoughts in my head about a particular new ETF, derivative contract or interesting industry development is, in my opinion, a fairly novel way to “keep the knife sharp”. Portfolio construction is tough enough as it is but with new products and services continually popping up, filtering the good from the not-so-good is a worthy exercise. Interestingly, I found that the ETF assembly line slowed down enough last summer for me to go on hiatus (thus, the nearly zero posts in the past eight months). There have been quite a few new arrivals, some actually a bit interesting but somehow, not enough to get me excited and write about them. Or maybe I’ve just been lazy. Perhaps some laziness but also a bit of consulting work thanks to the blog and even more due to the conference speaking.

I always meant to blog about the wider theme of “beta” but due to the wide proliferation and exposure of exchange traded funds, the other big beta instrument, derivatives, was kept to the side. Truthfully, my past was always more focused on the use of derivatives but when I blogged about it, I had limited feedback. Very different with ETFs … when I wrote something about a unique ETF about to come to market, the Wall Street Journal called me up. You now know why I focus so much on ETFs.

But once in a while, another story pops up on the derivative side that’s too big to dismiss. I wish it were some new exposure (like carbon credits) but unfortunately, like hedge funds, the derivatives markets provides a spectacular blowup/debacle once in a while and like a collision on the freeway, everyone pauses to take a look. This time, it’s SocGen’s (Société Générale SA (SCGLY.PK)) turn. Facetious as that may sound, this graph from the WSJ gives a quick snapshot of past blowups back to the days of Nick Leeson and slightly beyond.

Last week I spoke at the “Inside ETFs” conference produced by Exchange-Traded Funds Report [ETFR] and Financial Advisor Magazine. Unlike the vast majority of other ETF related events I have been to in the past year, this conference was not dominated by those employed by ETF provider firms but rather by financial advisors. And for a first time event, well … I’ve never seen that many attendees for an inaugural conference. Kudos to the organizers but it also says something about the growth of ETFs.

Anyway, on the afternoon of day one, I was a panelist on a discussion focused on investment risk. I ended up getting into a bit of an “anti hedge fund rant” which was not my intention and part of this blog entry is to clarify some points which could not be made simply due to the limited time allotted to our session. So, what follows is what I would have hoped to cover that day, either did cover in a relatively light matter or not at all, or have considered now that a few days have passed.

Taking advantage of downside market action in international and emerging markets can now be implemented through new ETFs from ProShares. No comments on this from me as I’ve already said for a while that the market has needed this so here’s the press release:

ProShares Launches First Short International ETFs

Roughly a year ago, I wrote a post discussing the concept of alpha (that rare and valuable thing) which becomes less rare and eventually commoditized into beta in time. Here’s a bit of what I said at that time:

Isn’t alpha supposed to be the returns from a strategy that is based on market inefficiencies? If so, then shouldn’t these market inefficiencies disappear as other players enter the field? This line of thinking is discussed in this paper available on SSRN: