The field of Ethical finance

In this blog, I would like to share the recent developments in the ethical finance domain of the financial services. Ethical finance has been a hot topic for a considerable time now. My business school had a block module(an action packed one week course) on this topic. One of the highlights was the the role of ethics and values in finance. It is amazing that, most of the headlines in FT/WSJ are full of issues related to this field, albeit for the wrong reasons. The Goldman Sachs-Abacus issue related to John Paulson or the trader at Societe Generale,leaving aside the 'n' number of Ponzi schemes run under the name of secured portfolios.The latest being the case of Helmut Keiner, the german hedge fund manager who defrauded investors for £249 million. This case is turning into an ill thought script for a novel. The Ponzi schemes are actually the most convincing reason for the existence of Socially responsible investments.They bring the ethical question into critical focus.As they put their hard earned money into a fund, investors have an absolute and unquestionable right to know the nature of their portfolio.This is what is done by SRI's. In the same veins, the course of ethical finance has helped me to understand the tremendous size and scope of socially responsible funds and its wider implications. According to one estimate currently the $1.2 trillion of funds are managed by SRI's(Socially Responsible Investments) and this figure is increasing. The latest development in the SRI funds is to provide an opportunity to investors to "mix and match" companies or investment that are highly consonant with their individual values. For example investors can set filters for selection of companies, by preferring companies that pollute less, use better recycling systems or even address global poverty reduction issues. This model has been developed long back and has recently(not so recent though) picked up, from an unexpected quarter, the middle east, viz. Islamic finance. Wrapping up, the key emerging trends are related to,

1.I think the most important value that ethical finance has managed to address is: transparency. Since SRI's give an options to investors to filter out their selections they become more open and this reduces the chance of large scale fraud(read ponzi) by multiple factors.Funds that address this important value are more likely to fall under ethical ones rather than just complying the checklist for SRI guidelines and principles. So transparency+ Filter options = nearly ethical fund/investment
2. Tremendous opportunities to raise capital by tapping the SR investors. Once the company adhers to the value of its investors it can raise capital at favourable rates and terms.

Way to go in the future, but will it go this way lets see !

The Hedge Fund Industry: Renaissance Funds

"Does Renaissance Technologies — arguably the most successful hedge fund in the history of the world — know why it makes as much money as it does? A couple of weeks ago, I thought that it did, after reading a piece about RenTech’s Robert Frey in the FT. One of the fund’s four principles, he said, was rationality – “it can’t just be statistically valid”. You have to employ reason to identify a statistically significant but spurious pattern — which meant, I thought, that RenTech had a common-sense test: it wouldn’t enter into a strategy without having some kind of grip on why that strategy should work"

There's a lot of talk about Ren Tech these days, and it seems that experts want to crack the "genetic code" for its fabulous run so far.

"It’s weird, but if you believe Mallaby and Mercer, it’s true: somehow RenTech discovered a secret formula for making money. Follow the rules it spits out, and you’ll be rich, even though the formula makes no visible sense at all."

Correlation, Strategy, Luck, data mining, algorithm(google type), or maybe simply a mixture of all these things! The best part of blogging, and not being a expert is, to make some extraordinary guesses, wild guesses or maybe true sometimes.So what is the reason for Ren Tech's accurate calls(and puts) ? My guess is they use extensive correlation algorithms which are refreshed as in google periodically and they are more dependent on speciality indices, where the patterns are easy to analyse. But the essential crux is between aligning the correlations, patterns with the risk return strategy. By this I mean, only the returns for Ren Tech are consistently mentioned and analysed by the news experts. What about the risk? The level of risks involved, the internal thresholds of risk taking and management are the key factors which differentiate Ren Tech from the pack.That's just a naive guess !

A few good reasons to work in Financial Services Industry this month(and many more..)

• Came across a news in FT (date 26 July), the city added 1700 new jobs in June. and nearly all in the Financial services. The three biggest job creators were US, China and India.
• The continuing movement of banks from non banking activities (Barclays- Blackrock merger) will provide a rising degree of stability to the industry, may be this activity will be accelerated after the results of "stress tests" across Europe. Just saw the stress test graph and could not stop wondering about the number of German Banks hovering around the baseline capitalisation rate of 6.2%, All this is a precursor, to the exciting times for the financial services in the near future. An overhaul is round the corner..

Finally some good links I have come across that explains the success of Renaissance funds, maybe people already know the secret behind renaissance funds, its quite obvious, to be true. One good paper to know more(recommended by a friend) is

'When There is No Place to Hide' - Correlation Risk and the Cross-Section of Hedge Fund Returns by Buraschi, Kosowski et al.

Can be found at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1639984

Bye for now !

Developments in Financial Services Industry:Exciting times for a career opportunities

Robert E. Diamond Jr., the president of Barclays, has a lot to say about bank bailouts, stress tests and executive bonuses.

The bank has weathered the financial crisis far better than its competitors, staying profitable during the crisis and even picking up Lehman Brothers’ lucrative North American operations. Mr. Diamond told the Fox Business Network on Friday that he was a supporter of the financial regulatory overhaul and that it would help end “too big to fail.”

The comments above show the opportunities that bigger banks such as Barclays see in the post-regulation era. Now that the banks have accepted that regulation is "très important à l'avenir" its going to dominate the scenario on the banking domain in coming years.