Bedrock calls for strong, steady leadership in uncertain times

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Bedrock private investment office advises families and individuals across Europe and beyond. With no products of its own, it selects investments for clients and provides a range of associated services, as managing partner Ariel Arazi explains.

How do markets feel to you at the moment?

People don’t like uncertainty and there is a lot of it about. Volatility has been quite low until this summer, but it has definitely increased now and there has been some ­complacency.

Liquidity feels like it has dried up through the summer and has not picked up since.

We don’t see any inflation risk for now, but everyone’s inflation is ­different.

Already, there is definitely a loss of pricing power, and the world is divided into those who have debt and those who don’t.

A real inflation risk needs a tighter job market. We are not there yet, but it is ­something to watch carefully.

How are you protecting your positions?

We bought a bit of protection for ­portfolios at the end of June, before the US debt ceiling deadline, and we have been trading around this ­position a bit.

The only way we ­protect against volatility is with puts on equity markets.

It was simple and cheap at the time. There are lots of tail risk instruments out there, but we don’t use any. The risk is on equities, so we focus on that.

Do you like gold?

I can’t explain the price, despite the many valuation models. The ­opportunity cost is not there, but I can’t see it replacing fiat currencies.

I worry when I hear there is more gold in ETFs than there is available in the whole world.

In the 1980s, the gold price suddenly dropped 50% in a matter of days, and I can’t see why that could not happen again.

How do you select funds?

We are always looking for new funds and managers, but we don’t have a high turnover and dozens of ­managers.

We like to build a long-term relationship with the ­manager, and diversify by style.

There are no hard rules such as three-year track records. If a manager is known to us, we can go on day one (which happened in 2009). On the hedge fund side, there are still too many managers around.

The business model is ­attractive and it is easier to start a fund than to run it ­successfully.

There is raising money, running the business and then investing – very few are good at all of them.

For some time, we had higher allocation to hedge funds than many, but we have cut back.

What is the biggest challenge for portfolios now?

It is currency management which is the real dilemma. You can be right on your asset allocation and lose a lot of money if you are wrong on your ­currency allocation.

It used to be that a client lived in one country and spent in one currency. Not any more.

Clients operate internationally. At Bedrock, we can ­reference a client in one currency, or a basket of ­currencies, and measure his ­performance via a dual ­currency benchmark. Our currency allocation is done via an overlay by a client.

What do markets need to recover? What is lacking?

For a start, there is poor leadership of every sort, in Europe and ­elsewhere. The region’s leaders are being tested and there are clearly a lot of cracks in the system. ­Governments ­instinctively think more regulation will help.

But the financial services sector has been the most r­egulated in the world, and yet it is the one that has failed.

To restore confidence, markets need to feel truly ­competent control by authorities who understand what is going on, and mean what they say.

So, it is not the EU Parliament or Council. It may be ­Germany. ­Obviously, things can’t change ­overnight, but from all governments there need to be incentives to help people to work and generate wealth.

Help firms hire people, simplify tax systems and end uncertainty about rule changes.

Look at Asia – somewhere like ­Singapore. OK, it has favourable demographics, but it has low tax rates and simple rules that don’t keep changing. It is not over-leveraged and wealth creation is supported.

If you treat asset management companies like they do here in Europe, then they will move. It doesn’t matter to the high net worth client where their asset managers are based.

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