Tuesday, October 28, 2008

Is This the Real Reason for Today's Equity Market Gains?

From FT Alphaville:

From an email currently circulating the City of London:

Gut wrenching declines in US and global equity markets during October coupled with bond market outperformance will undoubtedly require MASSIVE monthly asset rebalancing by US pension funds –- rotating OUT of bonds and INTO stocks. This may have a profound “short-term” impact on performance of risk assets since the required rebalancing appears to eclipse even the large rotation after the 1987 stock market crash. As a very simple example, we asked our quant colleague (xxx) to analyze a balanced portfolio targeting 40% domestic bonds (SBBIG Index) and 60% equities.

We assumed that the equity portion is comprised of 75% domestic stocks (MXUS Index) and 25% EAFE international equities (MXEA Index). The attached rebalancing calculations based on closing levels last Friday (Oct 24) suggest that US pension funds would need to reduce bond holdings by a WHOPPING -4.1% while increasing equity allocations by a corresponding +4.1%, all by the close of business at month-end on Halloween Friday (Oct 31)....MORE

Here's the list of our recent CalPERS posts including "Pension Funds Drive Growth Of Alternative Assets. And: CalPERS Up 68% on Commodities; Down 31% on Real Estate. Action, Baby, Action!" and "Come on Lucky Seven: CalPERS Bets on Alternative Investments".