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Bloomberg Markets Magazine

Bloomberg Markets Magazine December 2016

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Bloomberg Finance LP
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in this issue

6 min
how hedging, liquidity, and a certain someone upended the year of the peso

FOR THE MEXICAN PESO, 2016 wasn’t supposed to end this way. At the beginning of the year, most currency forecasters agreed: The peso was grossly undervalued. Estimates compiled by Bloomberg at the time put it on course for the biggest gain among major currencies. Bank of America said things would get better; Citigroup and HSBC Holdings said they certainly wouldn’t get any worse. Yet as 2016 draws to a close, the peso isn’t an emerging-market standout. Instead it’s the world’s worst performer. Battered by events far beyond its borders—such as the U.K.’s Brexit referendum—the currency tumbled 6 percent against the U.S. dollar this year through Nov. 8. And then Donald Trump was elected president of the U.S. Overnight, the peso plunged more than 13 percent, surpassing 20 per dollar for the first time.…

2 min

Robert Jen (“This Model Lets You Track and Forecast China’s Yuan Fixing,” page 42) is an FX market specialist at Bloomberg in Hong Kong. Before joining Bloomberg last year, Jen worked at JPMorgan Chase and UBS. “With lackluster growth, and monetary policy stretched to the limit in developed economies, risk sentiment remains one of the last linchpins of normalcy in financial markets,” Jen says. Go to {.RONROFF Index GP } to chart a quantitative measure of risk-on, risk-off sentiment, which rose after Donald Trump’s election. Larry Fink, who’s been a professional photographer for 55 years, shot Vanguard founder Jack Bogle for our cover story, “We’re in the Middle of a Revolution” (page 74). “Jack Bogle is a sweetheart,” Fink says. The photographer’s work has been exhibited in major museums around the…

6 min
should you hedge currency risk? here’s how to find out

INVESTORS WHO BUY and sell global bonds and stocks continually face the question of whether to hedge the currency exposure of their investments. The answer is complicated, of course. Some investors eschew currency hedging altogether. Strategic investors may plan to hold foreign-currencydenominated assets over such a long period that they expect FX fluctuations to mean-revert, with an expected return of zero. Other investors may hedge a fixed amount of their exposure. Quants at Pacific Investment Management Co. recently put out a paper arguing that those common approaches are less than optimal. Instead, the Pimco researchers wrote, the hedging decision should be made on a currency-by-currency basis. To dig into how a hedging strategy for a specific currency could work, you can use the Portfolio & Risk Analytics (PORT) function to explore the correlations…

12 min
the world’s most important number starts here ... ... but really, the story begins with this man

Despite its ubiquity, few outside the world of finance had heard of Libor until regulators found that a dozen banks—Barclays, UBS, and Citigroup among them— had colluded to manipulate the benchmark interest rate and fined them $9 billion. The scandal was personal for 90-year-old Minos Zombanakis, who watched the concept he created in the 1960s morph from a respected pillar of the global financial infrastructure into a byword for greed and corruption. In this excerpt from Gavin Finch and Liam Vaughan’s forthcoming book about the Libor scandal, The Fix (Wiley, December 2016), the journalists trace the roots of this mysterious number. IN 1969, NEIL ARMSTRONG walked on the moon, Richard Nixon became president of the U.S., and 400,000 hippies descended on a sleepy New York farm near Woodstock. On the other…

8 min
the man who ran china’s biggest bank looks west

JIANG JIANQING CONSIDERS himself a connoisseur, not of fine French wines, which you might expect from a banker of his stature, but rather of financial crises. During a career in Chinese banking that’s spanned four decades—including time as the head of Industrial & Commercial Bank of China, the world’s biggest lender by assets—Jiang has studied meltdowns through the ages. He’s written books and articles on banking history and the not-so-infrequent financial crises the world has witnessed over the past few centuries. “Younger generations will forget the reasons,” he says in a recent interview, pointing to three enduring themes behind the calamities: economic imbalances, shoddy regulation, and greed. Will China—home to bad-debt-burdened banks, heavily indebted companies, and an overheated housing industry—be the scene of the world’s next financial train wreck? The debate is…

6 min
this activist built one of the foundations of passive investing

ART LIPSON COULDN’T have picked two more distinct ways to shake up the bond market. Back in 1973, Lipson first made a name for himself by creating the bond index that grew into the Lehman Brothers Family of Indices. Now the Bloomberg Barclays Indices, they’re the benchmarks for many of the world’s largest fixed-income mutual funds. Among the funds that track them are those of Vanguard Group, the pioneer of low-cost indexing as an alternative to higher-fee active strategies. These days, Lipson also targets fund management costs—and entrenched managers— from his perch at Western Investment, the Salt Lake City-based hedge fund he founded in 1997. As an activist investor, he’s crusaded against certain closedend funds that he thinks ignore shareholders’ interests in favor of raking in fees. “They violate their fiduciary responsibility…