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The Liquidity Curse—Searching for Alpha for February 2013
No one wants what anyone can have. Such is the case with free-flowing injections of money into the financial system.
Cash is trash, after all. It's easy to come by, yet has little redeeming value for those who hold it.
The liquidity curse is the newest, coolest way to explain the rally in equity prices. Frustrated by low returns in CDs and Treasuries, investors will eventually give up and pour their money in the stock market. The result, according to pundits, is a nice steady rally in stock prices.
And the spigot is only half on. There is such a tremendous vacuum in equity flows that the stock market will act like a sponge. But like any type of "flow trade," even a temporary slowdown in volume could frustrate retail investors looking to re-enter the markets after experiencing a devastating 2008 and missing the subsequent run-up.
Don't get me wrong. I like stocks here, but a 5+% month is a bit extreme. One might want to exercise caution as they add to positions.
About the Author
Ben Warwick, Quantitative Equity Strategies
Veteran investment strategist Ben Warwick brings 20 years of investment management expertise to AdvisorOne.com in his blog, Searching for Alpha. His market and economic insights provide readers with an insider’s view on generating alpha through asset allocation, the use of strategic portfolio “tilts” and alternative investments.
Ben Warwick founded Quantitative Equity Strategies (QES) in 2002 as a platform for implementing his quantitative investment strategies. The firm manages assets with traditional long-only equity and fixed income, private equity, managed futures and alternative investment mandates. QES has developed an industry leading expertise in building investment programs that can replicate alternative returns, while offering daily liquidity and transparency. These products include the HFRq, a hedge fund replication strategy developed in concert with Hedge Fund Research in Chicago; the Managed Futures Beta Index, with Aspen Partners; and the Nomura QES Modeled Private Equity Returns Index (PERI), which was developed with Nomura Bank and Preqin, the leading source of information in the private equity industry.
He is the author of several books, including "Searching for Alpha: The Quest for Exceptional Investment Performance," (Wiley, 2000) and "The Handbook of Managed Futures," with Carl Peters, (McGraw-Hill, 1996). He can be reached at ben@qesinvest.com.
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