Asset allocation

In this article, we explore whether it makes sense to incorporate leveraged ETFs into static and dynamic long-only asset allocation strategies. Leveraged ETFs promise amplified exposure to the underlying asset, offering the potential for significantly higher returns during favorable market conditions. However, this comes at the cost of much higher volatility, path-dependency, and the well-known issue of volatility decay, which can lead to substantial underperformance over longer periods. Our objective is to examine if — and how — leveraged ETFs can be systematically integrated into portfolio construction so that their benefits can be captured while mitigating their inherent risks.

MicroStrategy has become one of the most polarizing companies in public markets. Once a conventional business intelligence firm, it has transformed into the world’s largest publicly traded Bitcoin proxy, holding over a million BTC on its balance sheet and continuously raising capital to buy more. Supporters praise it as a visionary “Bitcoin ETF with leverage,” while critics argue it is an irrationally overvalued vehicle whose market capitalization regularly trades far above the fair value of its underlying assets. The persistent premium — the gap between MicroStrategy’s equity value and the market value of its Bitcoin holdings — has puzzled analysts, defied traditional valuation logic, and raised the question: why does this spread exist, and why does it not close through arbitrage? A recent academic paper, Valuing MicroStrategy, offers a structural model that explains this phenomenon and sheds light on how the firm’s unique financing mechanics allow its stock price to exceed the value of its assets.

Cryptocurrencies have matured from experimental curiosities into a viable investable asset class whose return-generation and risk characteristics merit treatment within empirical asset pricing. A recent paper by Nicola Borri, Yukun Liu, Aleh Tsyvinski, Xi Wu summarizes ten facts from the literature that show cryptocurrencies share important similarities with traditional markets—comparable risk-adjusted performance and a small set of cross-sectional factors—while retaining distinctive features such as frequent large jumps and price signals embedded in blockchain data. Key themes include portfolio diversification, factor structure, market microstructure, and the evolving role of regulation and derivatives in shaping market discovery and stability.

Gold has been in the headlines lately as it climbs to new highs, prompting many investors to look for ways to benefit from the rally. However, many institutional investors – such as mutual funds and pension funds – face restrictions on buying physical gold or gold-backed ETFs. Instead, they often turn to gold mining stocks to gain indirect exposure to gold’s price. That approach seems logical on the surface: mining stocks typically offer leveraged exposure to gold’s movements. But as highlighted by Dirk G. Baur, Allan Trench, and Lichoo Tay in their recent study “Gold Shares Underperform Gold Bullion”, this strategy can be misleading. The authors demonstrate that, over the long run, gold mining shares structurally underperform physical gold itself.

Understanding how Bitcoin-related instruments can fit into traditional portfolios is increasingly relevant for investors. Some risk-averse investors do not like to hold cryptocurrencies in their portfolios strategically; however, they may be open to investing in crypto-linked assets on a tactical level. In this context, our goal is to explore how we can provide short-term Bitcoin exposure while contributing to overall portfolio balance and potential downside protection.

In the realm of quantitative finance, understanding the dynamics of real estate returns over extended periods is often overlooked, which is not good, as real estate constitutes a significant portion of investors’ portfolios. The article titled Global Housing Returns, Discount Rates, and the Emergence of the Safe Asset, 1465-2024 fills the gap and provides a comprehensive historical overview of real estate yields, offering a chronological overview of real estate returns not just over a few decades but over several centuries.