Portfolio Alpha: The Impact of Liquidity
The S&P 500 index was range-bound after the Fed ended QE
The Federal Reserve ended its QE (quantitative easing) in October 2014. Since then, the S&P 500 index (SPY) (QQQ) (SPXL) has been trading around 8% from its level on October 29, 2014. On May 18, 2016, the index had a high of 2,129.2 on a closing price basis. That was about 8% higher than the levels on October 29, 2014. On February 11, 2016, it had a low of 1,829. That was about 8% lower than the level on October 29, 2014.
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What does the range-bound index explain?
The range-bound index explains that QE is one of the important drivers for the overall Market. The earnings of the S&P 500 index (IVV) (VOO) weren’t lucrative enough to help the index break this range.
How has it impacted portfolio alpha?
In an active fund management strategy, most of the corpus invested has witnessed a high expense ratio due to the churning of portfolios. While the equity market was range-bound, the commodity was in a downturn in 2015. A high expense ratio with lower returns impacted the overall alpha of an actively managed fund.
In passive style, an equity portfolio witnesses lower returns while a portfolio concentrating on the commodity has started to recover its losses.
In the next part of this series, we’ll take a look at the performances of various hedge funds.