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Toyota investing $1 billion in ride-hailing company Grab

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TOKYO — Japan’s top automaker Toyota Motor Corp. is investing $1 billion in Grab, the leading ride-hailing company in Southeast Asia, the company said Wednesday.

Toyota said it reached a deal with Grab Holdings to strengthen the existing partnership to grow in mobility services in the region.

A Toyota executive will be appointed to Grab’s board and another Toyota official is being tapped to be an executive officer at Grab, the company said.

Grab, which is similar to Uber in the U.S., is in eight nations in the region, including Malaysia, Singapore, Thailand and Indonesia.

Uber’s Southeast Asian operations were acquired by Grab earlier this year. Uber retained a 27.5 per cent stake in the new merged entity.

Toyota was initially cautious about ride-sharing and autonomous-driving technology.

In recent years, the maker of the Camry sedan, Prius hybrid and Lexus luxury models has been aggressively playing catch-up, signing on partners around the world.

Grab, based in Singapore, has recently attracted investments from SoftBank, a Japanese technology and telecommunications company, and Didi Chuxing, a Chinese ride-sharing and autonomous driving company.

In Japan, where Uber has been trying to grow, ride-sharing is facing resistance from the nation’s powerful networking of cab companies, especially in urban areas like Tokyo. Toyota supplies the bulk of the vehicles used by such cab companies.

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Follow Yuri Kageyama on Twitter at https://twitter.com/yurikageyama

Her work can be found at https://www.apnews.com/search/yuri%20kageyama

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Can factor investing kill off the hedge fund?

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In 2001 Clifford Asness, a cerebral but fiery-tempered hedge fund manager with a penchant for comic book memorabilia, penned a paper arguing that his industry’s skills were “overstated”. Understandably, it went down like a lead balloon.

Mr Asness was inundated with irate calls from some of the industry’s biggest names, and even got the occasional glower at school events attended by other hedge fund fathers. “I got yelled at by a lot of famous people,” he recalls.

He survived the opprobrium. Mr Asness’s company AQR is today a major player in the hedge fund industry. Its $226bn of assets under management outstrip even Ray Dalio’s Bridgewater Associates. But rather than a hedge fund, AQR could now arguably be better described as a hedge fund killer.

AQR is at the vanguard of a revolution quietly sweeping through the asset management industry: “ Factor investing”, which in theory breaks down market returns into their basic components, researching what drives them and trying to systematically exploit their characteristics.

Factor investing is part of the broader world of computer-powered “quantitative” finance. But rather than scour markets and oceans of data for fleeting signals, factors are the big, persistent market drivers that in theory exploit timeless human foibles, such as our tendency to favour glamorous stocks over solid ones. Financial academics argue that a lot of what asset managers do is take advantage of these well-known patterns, anomalies and inefficiencies. But if one can do so systematically and cheaply, why pay for an expensive fund manager?

“Before, market drivers were like gods in the sky — mysterious and often unfathomable. But with factors we can now understand what actually drives performance,” says Marko Kolanovic, head of quantitative research at JPMorgan.

Think of factors as the basic ingredients of a solid meal. By deconstructing and finding the healthiest components, fans say they can be reassembled into a better-balanced, tastier diet. In other words, a more diversified, robust and cheaper investment portfolio than one built with traditional, blunt asset classes like stocks and bonds.

Recent results have been mixed, with many factor-focused funds — including AQR’s — suffering a mediocre or dismal 2018. But many pension funds, endowments and even retail investors are still embracing this new approach. BlackRock estimates that there are $1.9tn of assets in dedicated factor strategies, and predicts this will swell to $3.4tn by 2022.

Some have even gone so far as to call AQR the “Vanguard of hedge funds”, a reference to the passive investing behemoth founded by Jack Bogle that has helped popularise cheap, index-tracking funds for the masses and unsettled the mutual fund industry in the process.

That may be a step too far to describe an investment group that still boasts plenty of expensive hedge fund strategies, some of which have also struggled in 2018. But it is “what we want to be. It’s aspirational,” Mr Asness admits. It is a description tacitly endorsed by Mr Bogle himself, who has said that among hedge funds AQR “is the one I hate the least”.

Defining factors

Value

is the oldest and best-known factor, tracing its genesis to seminal work by Graham and Dodd in the 1930s and its popularity to Warren Buffett. It refers to the tendency for relatively cheap securities to outperform relatively expensive ones, as many investors wrongly prefer the glamour of racier “growth” stocks.

Momentum

gets its mojo from the fact that assets with a positive trend tend to continue to do well, and those that are falling continue to slide. Most academics say the phenomenon is rooted in human psychology and how we initially underreact to news but overreact in the long run, or often sell winners too quickly and hang on to duds longer than advisable.

Quality

is powered by the fact that lower-risk, safer companies tend to do better than riskier, more indebted ones. The factor is often attributed to how investors systematically overpay for shakier stocks with seemingly better prospects, but underappreciate companies with boring but defensive business models.

Volatility

is based on the observation that stolid stocks with typically muted movement actually tend to outperform more volatile ones over time, contrary to the view that investors should be compensated for the additional risk of buying more turbulent shares. The volatility factor indicates that investors can do better — and suffer less jarring movements — by buying steadier stocks.

Size

captures the tendency of smaller stocks to do better than bigger ones in the longer run, possibly because they are less glamorous or risky. Since 1979 the Russell 200 index of “small-caps” has outperformed its big brother benchmark by almost 1 percentage point on average a year.

Carry

is mostly specific to the bond market — albeit related to value — and refers to the tendency for higher-yielding assets to provide higher returns than lower-yielding assets. In the equity world it reflects how companies with higher dividend yields tend to outperform their peers.

In 1992 Eugene Fama and Kenneth French, two professors at the University of Chicago Booth School of Business, published a paper that showed how investors could beat the stock market’s returns — the “beta” in finance jargon — by taking advantage of two simple factors: the tendency of small or cheap companies to outperform over time.

Factors are often called risk premia because they represent the extra compensation investors receive for taking on some specific risk. Many factors have been known for decades. Some pioneering “quant” investors influenced by academic research started to exploit factors in the 1970s. But the Fama-French paper was a bombshell, largely because Prof Fama is the father of the “efficient markets hypothesis”, which argues that investors cannot consistently beat the market.

“The king of EMH said that there were factors that had positive outperformance,” says Rob Arnott, head of Research Affiliates, a factor-focused investment group. “It blew people away.”

In 1989, Prof Fama took on a precocious PhD student as an assistant. Under his tutelage, Mr Asness wrote his thesis on a new factor, momentum, on how stocks that have gone up tend to continue to rise, and falling stocks tend to keep sliding. Given how it went against Prof Fama’s thesis it was “nerve-racking” telling him the dissertation, recalls Mr Asness. But Prof Fama says he was more upset that his protégé later chose the grubby world of investing over academia.

It worked out fine for Mr Asness. AQR is a privately held company, but according to filings by Affiliated Managers Group, which owns a minority stake, its revenues jumped 39 per cent to $1.3bn last year, and its net income rose over 50 per cent to $807m. For comparison, Man Group — the world’s biggest publicly listed hedge fund group — notched up revenues of $1bn and profits of $384m in 2017.

Jack Bogle (right), the Vanguard founder, called AQR, founded by Clifford Asness (left), the hedge fund ‘I hate least’ © Bloomberg

This has made its co-founders billionaires. Mr Asness is worth $3.6bn, and David Kabiller and John Liew both have an estimated $1.25bn, according to Forbes. A fourth co-founder, Robert Krail, retired for health reasons some years ago. Mr Liew and Mr Krail co-authored the 2001 paper with Mr Asness.

The rest of AQR’s quantitative analysts are not doing badly either. AQR spent $366.9m on compensation, benefits and other related staffing expenses last year, or more than $400,000 on average for its 914 employees (which includes 73 PhDs).

There are generally thought to be a “big five” in factors — size, value, momentum, volatility and quality. But over the years, academics have discovered scores more across different asset classes. While some of the research is well established, it is mainly in the past decade that interest has exploded.

Of the $1.9tn in factor strategies, BlackRock divides the industry into “proprietary factors” that typically reside in mutual fund structures ($1tn), “enhanced factors” in hedge fund vehicles ($209bn) and $729bn of “ smart beta” exchange traded funds, cheaper vehicles that tilt towards one or several investment factors.

Andrew Ang, head of factor investing at BlackRock, argues that the falling cost has been the primary catalyst. “Cars were invented in the late 1800s, but it wasn’t until Ford’s Model T that they took off. And it was because of cost,” he says. To describe the impact, he uses another metaphor: “Asset classes are like watching TV in black and white, while factors is like viewing it in colour.”

By in theory replicating what a lot of professional money managers do at a fraction of the cost, factor investing puts more pressure on fees. This is why Mr Asness thinks AQR can play the same disruptive role for hedge funds that Vanguard did for mutual funds.

“It is part of our business to be the Vanguard of hedge funds. It’s not all of our business, by any means. But to take some of the basics and say you should get this for lower fees,” he says. “What [hedge funds] are doing as a group is good, but simple. And they’re kicking up a whole lot of dust around it.”

Eugene Fama accepting his Nobel Prize for economics in 2013 © AFP

Probably the first institutional investor to embrace factor investing was PKA, a $39bn Danish pension fund. In 2011 it started shifting its entire portfolio towards a more focused stream of risk premia, shrinking the number of asset managers it employs from 25 to just five. One of the managers it has kept working with is AQR, and Nils Ladefoged, the PKA executive who led the restructuring, is full of praise for the firm.

“They look at an asset and decompose it into various factors and think of the best way to harness them,” he says. “They are academic, but also conscious of the practical issues.”

PKA might have been one of the first investors to shift towards factors, but it was not the last. A State Street investor survey found that two-thirds now use factors to at least analyse their portfolios, and a third said it was their most important method. Indeed, factors are now an integral part of the industry.

Nonetheless, factor investing has plenty of detractors — even from its proponents. “It is aggressively oversold right now,” says Mr Arnott, another pioneer of the industry. “It shouldn’t be seen as a panacea. Factors can become materially expensive, and performance will mean-revert. Some factors have been performing better precisely because they’ve been getting inflows.”

Work done by Vincent Deluard, a strategist at INTL FCStone, illustrates this pitfall. In November 2016 he built a portfolio of S&P 500 stocks that failed to qualify for any of the five big US factor ETFs. But this “basket of deplorables” has since outperformed a basket of smart beta ETFs.

This is probably because many smart beta ETFs appear to be negatively correlated to interest rates, possibly because the data that academics crunch in their hunt for factors mostly only stretches back three decades — a period characterised by a secular decline in rates. Interest rates are now nudging higher, and this could be an Achilles heel for some factors.

“Investment managers will sell anything that can sell. Some of it is fine, but some of it is flimsy,” says Prof Fama. And even the ones that are robust will not always work. “A lot of people don’t know what they’re buying, but they’re buying a risk,” he adds. “If they’re willing to do so they will get a higher return over time. But there are long periods where by chance they just don’t turn up.”

That seems to be the case now, with many of the biggest factors simultaneously suffering a stinker in 2018 — hurting many big quant funds, including those managed by AQR. For example, its $4.8bn Style Premia Alternative Fund and $9.1bn Managed Futures Strategy Fund are down 7.4 per cent and 4.8 per cent this year. But the investment group is undeterred.

Mr Liew first met his future AQR co-founder at the University of Chicago, when another student pointed out Prof Fama’s assistant and whispered: “That guy [Asness] is ridiculously smart. He’s probably smarter than the professor. But the thing is, he knows it. He can be really insufferable at times.”

Mr Asness insists that his mentor is clearly the smarter one, but cheerfully admits that he does not always succeed in hiding his insufferableness. He also has a legendary temper, famously smashing a series of computer monitors during a rough patch in the financial crisis. He said later that the reports were exaggerated: “It happened only three times, and on each occasion the computer screen deserved it.”

But Mr Asness uses his emotional reaction as an example of why factors endure in the long run. Many of the anomalies that factor investing exploit are deeply rooted in human psychology, which is why they are not weeded out over time. And as long as even quants can fall prey to these foibles, then factors will have a bright future, he argues.

“It’s a high pressure cooker world. And when your factor is not working, it’s not an easy time,” he says. “But if we can’t keep emotion out of our own brains, it’s pretty good news for the factors, for the idea that investors aren’t perfectly rational is the reasons these factors work. No matter what the times bring, we will stick to what we believe in and keep doing it.”

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Wall Street letting fear overtake rational investing, market veteran Zachary Karabell says

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Zachary Karabell is concerned there’s too much fear on Wall Street, based on one particular question from his clients.

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“It’s ‘why aren’t the markets going down because there is so much negative news,'” the River Twice Capital president told CNBC’s “Trading Nation” on Friday.

Karabell said it’s the most disconcerting question he’s getting, especially since it’s often from professional financial advisors.

He saw it as a glaring signal that Wall Street is holding onto a “widespread assumption” that the markets should be doing worse, because of the uncertain political and geopolitical climates.

The latest jitters include President Donald Trump’s rhetoric suggesting his trade war may evolve into a currency war.

“I’m sure many people obviously disagree, [but] that there is more fear in words rather than fear based on actions,” Karabell said. “People are kind of undervaluing earnings. They are undervaluing fundamentals relative to that fear.”

The Dow Jones Industrial Average and S&P 500 Index failed to end the week in the green, posting their first back-to-back losing streaks in a month.

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China Is Investing In Its Own Hyperloop To Clear Its Crowded Highways

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GRIDLOCK. China’s largest cities are choking in traffic. Millions of cars on the road means stifling levels of air pollution and astronomical commute times, especially during rush hours.

The latest move to address this urban traffic nightmare: Chinese state-backed companies are making heavy investments in U.S. hyperloop startups Arrivo and Hyperloop Transportation Technologies, lining up $1 billion and $300 million in credit respectively. It’s substantial financing that could put China ahead in the race to open the first full-scale hyperloop track.

MAG-LEV SLEDS. Both companies are planning something big, although their approaches differ in some key ways. Transport company Arrivo is focusing on relieving highway traffic by creating a separate track that allows cars to zip along at 200 miles per hour (320 km/h) on magnetically levitated sleds inside vacuum-sealed tubes (it’s not yet clear if this will be above ground or underground).

Arrivo’s exact plans to build a Chinese hyperloop system have not yet been announced, but co-founder Andrew Liu told Bloomberg that $1 billion in funding could be enough to build “as many as three legs of a commercial, citywide hyperloop system of 6 miles to 9 miles [9.5 to 14.4 km] per section.” The company hasn’t yet announced in which city it’ll be built.

Meanwhile, Hyperloop Transportation Technologies has already made up its mind as to where it will plop down its first Chinese loop. It’s the old familiar maglev train design inside a vacuum tube, but instead it’s passengers, not their cars, that will ride along at speeds of up to 750 mph (1200 km/h). Most of the $300 million will go towards building a 6.2 mile (10 km) test track in Guizhou province. According to a press release, this marks the third commercial agreement for HyperloopTT after Abu Dhabi and Ukraine from earlier this year.

A PRICEY SOLUTION. Building a hyperloop is expensive. This latest investment hints at just how expensive just a single system could be in the end. But providing high-speed alternatives to car-based transport is only one of many ways to deal with the gridlock and traffic jams that plague urban centers. China, for instance, has attempted to tackle the problem by restricting driving times based on license plates, expanding bike sharing networks, and even mesh ride-sharing data with smart traffic lights.

And according to a recent report by Chinese location-based services provider AutoNavi, those solutions seem to be working: a Quartz analysis of the data found that traffic declined by 12.5 and 9 percent in Hangzhou and Shenzhen respectively, even though the population grew by 3 and 5 percent.

MO’ MONEY, MO’ PROBLEMS. There are more hurdles to overcome before hyperloop can have a significant impact in China. There is the cost of using the hyperloop system — if admission is priced too high (perhaps to cover astronomical infrastructure costs), adoption rates may remain too low to have a significant effect.

The capacity of a maglev train system would also have to accommodate China’s  growing population centers. That’s not an easy feat HyperloopTT’s capusles have to squeeze through a four meter (13 feet) diameter tube and only hold 28 to 40 people at a time, and there are 3 million cars in Shenzhen alone.

We don’t know yet whether China’s hyperloop investments will pay off and significantly reduce traffic in China’s urban centers. But bringing new innovations to transportation in massive and growing cities — especially when those new innovations are more environmentally friendly — is rarely a bad idea.

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