Thursday, May 22, 2008

XBRL in Plain English

A nicely done video on the benefits of XBRL - but it may promise a bit more than accounting standards can deliver. Worth watching nonetheless!

Sunday, May 18, 2008

Failed Pensions Directive?

The Pensions Directive has failed and should be replaced by a new version as quickly as possible, according to a panel discussion reported by IPE last week. The reasoning is that at this point, there are only five new cross border pension schemes in operation.

While I agree that the market response to the new opportunities offered by the Pensions Directive has been slow to date, talk of a "new" pensions directive is counter-productive in my view. The retirement industry has an unusually long time horizon, it is therefore not prone to hasty moves, especially not in the presence of regulatory uncertainty. As the CEIOPS Initial review of key aspects of the implementation of the IORP directive showed in April, there are important aspects that require legislative attention, thus the transposition of the pioneering project that is the Pensions Directive, while formally finished, is not complete. 

The Pensions Directive can be improved, but improvements should be approached in a gradual manner, as it is highly unlikely that IORP II could bring pan-European harmonisation of retirement systems. Hence impediments to cross-border schemes, such as taxation issues, need to be removed one by one. The attractiveness of cross-border schemes should be increased by expanding the scope of the Directive's applicability. Surprisingly, this is not part of CEIOPS' conclusions, but as described earlier, an important segment of several Central & Eastern European countries' mandatory occupational retirement schemes lies outside of the Directive's scope. This unfortunate omission is due to the fact that these countries did have no part in the preparation of the Directive prior to their accession to the EU. 

Saturday, May 17, 2008

nomos vs. thesis

High quality private banking investment commentators with an independent mind are few and far between. The most prominent instance in the Swiss market is Konrad Hummler, partner of Wegelin & Co. His monthly investment commentary is well considered, independent and often controversial - and available in English. The current May issue deals with the moral hazard of banking supervision in its current zero failure mode. Recommended reading.

Wednesday, May 14, 2008

XBRL becomes mandatory in US

According to this story, the long awaited US SEC decision has finally materialised today: XBRL disclosures are to become mandatory in the US for firms with a market capitalisation larger than USD 5 bio from the closing of the current fiscal year. All other firms will have to follow suit by 2010 (first XBRL filings). Non-US domiciled firms listed on US markets and reporting using IFRS will have to start disclosing in XBRL starting 2011. This is quite an ambitious time frame, indeed, but we don't complain as the use of interactive data by investors can only take off once the data is actually available.

Update: Here is the official press release.

Monday, May 12, 2008

Financial anti-matter

The recent paper "Is Managed Futures an Asset Class? The Search for the Beta of Commodity Futures" approaches this extraordinarily timely question from an unusual angle: practice. The fashionable economics ingredients promise to make it no less appealing: behavioural finance, disequilibrium and reflexivity theory. The authors question some of the most basic assumptions of the commodities futures markets and propose a hedging response model that distinguishes between four different market scenarios which may result in markedly different systematic roll returns. While the predictive value of this model is not immediately obvious, its ex post explanatory power is quite impressive. Most surprisingly, it is a good read, too. Here is their answer to the question: 
Answering our own question is managed futures is an asset class? It is anything, but ... If anything, it is the "anti-asset class". It is an observable materialization of behavioral finance, where risk, return, leverage and skill operate un-tethered from the anchor of an accurate representation of beta. In other words, it defies rational expectations equilibrium, the efficient market hypothesis and allied models—the CAPM, arbitrage pricing theory or otherwise—to single-handedly isolate a persistent source of return without that source eventually slipping away. (...) Unbeknownst to modern finance, the commodity futures markets may be the shoals against which rational expectations equilibrium, the "de facto ruling paradigm of financial economics," is eventually shipwrecked.

In view of this and particularly this, it may perhaps be time to indeed revisit one's CF long exposure, which has been entered into on the possibly naive assumption that the futures markets are tightly monitored net zero sum games that have no impact on the spot markets. 

Sunday, May 11, 2008

Analysis of competing hypotheses

The US Central Intelligence Agency's reputation for analytical accuracy may have been tarnished lately, but nevertheless it can provide useful generic tools for analysis under uncertainty. The chapter on Analysis of Competing Hypotheses from the publication Psychology of Intelligence Analysis is such a case in point: it describes in some detail the procedure how to arrive at the most likely hypothesis by way of analysing competing hypothesis, knowing that - against intuition - the hypothesis with the least evidence against it is often the best guess. The rigour of this approach may be excruciating, but it is also the most promising in my view.

Friday, May 09, 2008

Finance 2.0

I've had the great pleasure and privilege of presenting the CFA Institute Comprehensive Business Reporting Modell as well as its position on XBRL to the 17th XBRL Conference in Eindhoven. Needless to say that this was also a great opportunity to share & discuss some thoughts about the future path of financial research with participants. 

The slides of my presentation are available here, but I'm already in the process of reworking them, taking on board new ideas from the peer discussions. My thinking goes along the lines that XBRL will be a disruptive force in finance eventually, but not in the immediate future as data intermediaries are well positioned to leverage their incumbent interfaces with the cheaper and faster fundamental information. For them, XBRL will be sustaining - for a while. That also means that most professional investors - at least those on the sell side - will not care much about XBRL since they are receiving the goods indirectly via improved third party providers. Disruption will come to them by other means, however ... I am looking forward to this conference in the fall, which should firmly establish the debate among investment professionals.