Tag Archives: financial economists

None so deaf as those that will not hear….(AKA Irish Elites)

There was an interesting book launch last night at the Long Room in TCD. Phillipe Legrain is on a tour of various places, doing local and localized launches of his new book.

He, and Senator Sean Barrett who gave the launch, delivered very strong, impassioned speeches. In his book Legrain lays a large quantum of the blame for the mess on the failure of interlocking European institutions. He backs squarely the Irish need for sovereign debt relief ; he calls for debt-equity swaps for distressed homeowners and SMEs; he castigates the failure of the economics elite to see the crisis, and challenges the policy making apparatus of both local and European governance. He calls for hardball negotiations, and lays out a path for same.

Legrain is no fire breathing radical. He is however from personal and professional background and inclination deeply European. His book has been lauded with positive reviews.  He challenges us.

Given this, and given the importance of the topic on which he speaks, it was frankly astounding to see how widely the launch was ignored. With the exception of Sean Barrett, there was (as far as I could see) not a single faculty member from a single economics department; with three exceptions the same for business school faculties. The Central Bank? The Department of Finance? Taoiseach? Foreign Affairs? Most of the media? Any elected official of state? Nobody that I could see. We could create a list as long as the page of elite institutions (IBEC? IIEA?, ACCI? …..) who were NOT represented at this talk, or if so were very well disguised.  It was to my mind a clear example of how we have  a collective elite who have firmly pulled on the green jersey and decided to press on regardless. Maybe they are right, maybe wrong, but one thing we have learned is that groupthink is bad. We need outsiders to challenge, but we need also to be prepared to be challenged. Seems we aren’t.

 

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What gets measured gets managed – so how can we manage research without measuring it?

measurementThis is an expanded version of the “Left Field” column published in the Irish Times.Over the last couple of years there has been a growing feeling amongst all stakeholders – government (supposedly representing the people), the administration (Department of Education and HEA), and the higher education sector that there is an increased scrutiny on what exactly academics do. Nobody is quite clear where the impetus comes from, just as nobody is quite clear what it is that the answer might be.Much of the heat has come on the issues of contact hours and how much research (and of what kind) is of any “use”. Some consider that universities and indeed all third level is merely secondary shcool for adults, and that time spent in the classroom, sorry, lecture theatre, is the only thing that is worth rewarding. These usually also show breathtaking ignorance about the process of scientific investigation, with the extreme suggesting that we should only fund reserach whose results we know in advance…..Yes, that SFI grant into Academic Clairvoyance was a good idea. But, in essence its a debate about value for money. Leaving aside the fact that not every thing that has a price has value and not everything that can be valued has a price, we can and should accept that it is simply good management practice to attempt to find out how efficient and effective our work processes are and how they might be improved. Its even more useful when the inputs, money and academic resources (although seemingly not administrative) are in scarce supply.

serendipEfficiency is a technical concept – its about the transformation of inputs into outputs. For a given level of inputs (academics) can we get more outputs (graduates, googles, whatever). Effectiveness is a little more fuzzy, about how well we achieve our goals. In the former case we have cost and technical issues which can and should be investigated. In the latter we need to have clarity and stability about these goals in order for them to be assessed. And, in most cases we cannot even begin to measure effectiveness for years, if not decades. Plus, directed research, chasing imposed metrics, simply is not the only way to do business. There is a very long tail and a very long halflife to both “good” teaching and research. James Clerk Maxwell published in 1873 some equations he had worked on in 1865 which were abstruse and remote. That they later formed the theoretical basis of the Wireless in the early 1900s was not a directed outcome. Boole’s pamphlet on mathematical logic in 1847 had to wait for the best part of a century until the information revolution to be seen as the transcendental work that it is now seen to be. Wohler synthesised urea, closing the gap between organic and inorganic chemistry, in an accidental discovery Perkins work on dyes and the subsequent growth of synthetic organic chemistry came from a nearly discarded experiment in the synthesis of quinine. Atomic clocks were designed to test relativity and now form the basis of GPS satellites There are hundreds of examples of transformative products that emerged as byblows, serdips or sheer accidents, from basic research. In a wonderfully lucid essay in 1939 Flexner noted the importance of curiosity, serendipity and generally pootling about.

euknowHow we are moving in Ireland is towards the introduction of workload models and key performance indicators. Key performance indicators however are inherently political. The EU “knowledge triangle” suggests that higher education trades off between supporting business, education and research. Like all policy triangles it is in fact a trilemma- it is difficult if not impossible to excel in all three domains. Note that this is not to say that it is impossible to be active in all three- just that. And In Ireland we have tried for that. We have two sectors which, if they were to be closely examined have historical and natural affinities with two legs- the IoT sector has historically been orientated at teaching and business support, the University sector at teaching and research. If we require an increased emphasis on research from the IoT without additional resources, or on business support from the universities without additional resources we will degrade one or other of the existing strengths. And anyhow, how would we know what was being done was good?

manyhatsPart of the problem in the assessment of what we academics to do is that they seem to do lots of things. We teach we supervise we design courses we examine we sit on committees we hunt grant money we reach out to the community…. Most workload models try to fine-tune these to a faretheewell allocating points for this and that. But in reality we do one thing – communicate knowledge, be it to the academy (research), students (teaching) or to business and society. And here is where the problem is. How can we measure these activities so as to allow managers to allocate resources and to reward those who outperform norms and expectations?

pacioliWe can measure business impact in a crude fashion by patents gained and monies raised and spinoffs that rival google created. This is the dominant metric now obsessing the government, seeming to treat the universities as machines for the creation of the next FaceGoogle and wondering why there hasnt been a patent that morning. J C Maxwell or Faraday or Antonie van Leeuwenhoek would probably not have been funded by SFI. We can measure teaching eficiency in a crude fashion by how many hours an academic is in class. In the Institutes of technology there is a class contact norm of typically 16h per week. That is not the case in universities, leading to the assumption that as university academics teach less they do less. Nothing alas could be further from the truth. The key difference between the modal IoT lecturer and the modal university lecturer is the expectation and requirement of research activity. And that takes time.

passageoftimeIt is a reasonable question to ask about the impact or import of the research even if we cant realistically answer– what is not reasonable is to assert that research is in some way less difficult or less timeconsuming than teaching. Research is akin to venture capital. We need to do a lot to get a little output. Success is rare and failure the norm. Publication in toptier journals is exceedingly rare and more than one as fleeting as a shy higgs boson in a ghillie suit on a heather covered hillside. Acceptance rates (success) in decent journals or in gaining leading research grants is often less than 10%. Research grants can take literally months to complete with no guarantee of success. And doing a paper takes time. It takes typically in excess of 100 hours of work to get a finance paper to a stage where one is happy to put it out for even working paper review. And then it takes a long time to get it published. It can take between 6 months and 6 years to get a paper from initial submission to final acceptance in finance and economics and other social sciences. In fact, in finance, economics and political sciences where the papers are usually data driven this time requirement is perhaps on the low side for social science generally. In the arts and humanities there can be literal years with “no output” as monographs and books are chronovores of enormous appetite. During that time the paper is usually under review at symposia, conferences etc and further hundreds of hours are input in refining and tweaking. The total time requirements for publication of a single article in a set of leading journals in finance were estimated to average over 1600h in a 1998 study. Meanwhile for younger academics, those seeking promotion or permanency, or seeking to move to sunnier climes they require publications so this process starts in PhD times and continues with up to a dozen projects in various stages of the pipeline. None of these times are captured in crude workload measurement approaches. to somehow assume that academics in universities engaging in research are idle is to display a gross ignorance of the scientific process – eureka moments are few and far between. If genius is 99% perspiration and 1% inspiration adequacy is 99.9% perspiration and .1% inspiration. A further aspect of research for those who are research active is peer review and editing . Typically a paper gets published after a couple of anonymous referees have commented on it. Doing this referee job is time consuming – typically 4-5h reading and writing per paper. If one does 12 reviews per annum that’s 60 hours, or the best part of two working weeks. Imagine the editor of a journal receiving 300+ papers per annum, each of which has to be read through prior to sending for review and we see another hidden time cost of research. Teaching also takes time beyond the classroom. For every hour spent in the class you take 3 to prepare, review, reflect and redo the work. Even if one has a stack of slides and a good strategy its imperative to do a mock runthrough (that takes about the same time as teaching) noting as one does what is outdated, what is wrong, what doesn’t flow etc. And then one redoes the slides and delivers, finding that in the class there are new issues to be incorporated, new questions raised, issues that seemed pellucid actually as muddled as a government jobs initiative…. So a 16h class contact in the IoT doesn’t leve a lot of time in teaching term to do any research even if one were so interested. Of course, there’s always the evening and weekends but the many IoT staff who wish to be research active typically use the summer breaks to do it –Christmas and easter are usually taken up with marking essays and so forth.

phrenolBy all means therefore lets look at metrics of activity. But lets recall that these metrics typically measure output, not input and therefore cant be used as such for the measurement of efficiency or still less effectiveness. That’s not to say we should not measure research output. We should. Perhaps the issue is that we are scared of what we will find. Academics are terribly resistant to being managed and by extension to being measured. But we need to accept that without open transparent measures of research we will not allow the universities to show the extent to which they are engaged with the second leg of their historic mission. Measurement of research output is a crude proxy for research activity and even more so for research excellence. But like patents and so forth it is measureable. We don’t do this in Ireland. We have experience in the UK of several generations of research measurement. Many of us have been involved in these as assessors or as units of measurement. We can and should design a model builds on these and improves upon them, that measures research output, across units and the sector. This will show that there are many who simply do not engage in research (as measured). Every academic knows of people who simply turn up, teach and disappear. This puts an unfair burden on those who do research, and it is they who should be shouting loudest for such a metric. We have some example beyond the UK. Ontario has just done a similar exercise, and there are many measures of research activity for individual disciplines in Ireland, notably business and economics. What these all show is that there are many many academics that do not come onto the research activity radar. One can only wonder what it is that they do all day. Conceivably they are engaging with business and society but most who work in the sector would smile ruefully at that idea.

Until universities and the system managers (HEA and DES) determine what the role is of universities in relation to the trilemma we cannot however begin to reward or discipline academics or the sector for resource misallocation. What gets measured gets managed. By definition a poor measurement system will deliver poor management. But we are not measuring research in any manner in Ireland. Perhaps we should start.

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Green Jerseys, False Colours and the Irish Bond Market

There is a most interesting letter (of the Green jersey type) in the Irish Times this morning. It is from a Donal O’Mahony of Shankill and is on the wonderful performance of Irish government bonds. Ireland is truly lucky to have this sage, and also to have his namesake Donal O’Mahony the head of debt research at Davy stockbrokers (prime dealers in Irish debt). After all, they couldn’t be the same person, as who fly under false colours and not declare in a letter their interest and affiliation…. Anyhow, Shankill Donal states that we are addicted to “failure porn”,  in looking backwards, which tells me that the mindset that in the 1970s cut out of the biology syllabi the parts on the human reproductive system (durty filthy durty shameful durty stuff) still lives. Dont look back as then you might see stuff you dont like…

Anyhow Shankill Donal (not I guess to be confused with Davy Donal) says

” a stunning 88 per cent return in Irish government bonds since July, 2011 has gone largely unheeded by the Irish media, politicians and, most disturbingly, an insolvent Irish pensions fund industry . . . unheeded by all, perhaps, except those clear-headed international investors who see the improving creditworthiness that we ourselves discredit. “

okkkaay. Lets look at that.

First, and presumably because Shankill Donal is not Dawson Street Donal, he might not be aware of the (from my ivory tower view anyhow) significant debate on the bond performance. Shankill Donal must be a bond trader somewhere though as he focuses on the price of bonds, when most people focus on the interest rate on bonds. Shankill Donal and Davy Donal should get together and talk….Even a casual perusal of the interwebs will throw up dozens and dozens of articles on the irish bond market. But maybe Times Letters Page Donal doesnt use the intergoogler. anyhow, here is the most recent article I could find, to assuage him that yes, this ignorance is all in his mind.

Second, the underlying assumption is that the fall in yields is down to improved creditworthiness. Hmm.. Maybe he is a trader but he is no economist.  Bond investors care about creditworthiness only over the holding period. As nobody serious ever has to my knowledge suggested default on the actual NTMA issued government debt, as they were backed by the IMF and ECB for a period of years, as the strong likelihood is that some sort of (dont call it a bailout) deal will be in place from 2014 onwards, the strange thing is that irish bonds were ever so low (interest rates so high). Proof that he isnt really Dawson Street Donal is that he seems to think the fall in interest rates  / rally in bond prices is down to ourselves alone. Maybe hes a member of Sinn Fein? The fall in interest rates is of course down to a mild increase in risk appetite  a change in government from bumbling to fumbling, a realisation that the Euro is here to stay and the euro members seem willing to inflict and bear any pain to make that so, the continued efforts to stabilise the irish budget deficit, the apparent end (apart from clouds on mortgage debt and court cases on subbie toasting  to bank bailouts and a carry trade. The carry trade is of course the irish banks taking cheap ECB money and buying higher yielding irish debt. This has boosted the irish banks holdings of Govt debt to 10% or more, from 5% of a much smaller number in 2011. Victor Duggans blog on this is a must read. In essence, as Business Insider says s

“Simply put, Irish banks have dramatically increased their holdings of Irish government bonds, from a very low base.  This reflects the recapitalization efforts and tightens rather than loosens the linkages between the sovereign and domestic banks. The largely nationalized banks are funding a large share of the government’s deficit”

And those steely eyed wonderful international bond buyers that Shankill Donal loves? Well, theres one of em anyhow, Franklin Templeton, but that seems to be it. In fact, the NTMA said, and who can object

He welcomed the attention of US investor Michael Hasenstab’s Franklin Templeton Investments, which has become Ireland’s biggest private sector creditor over the past year-and-a-half by investing in bonds.Mr Corrigan said: “As an investor, Franklin Templeton are clearly very welcome in the positive view they have taken on the Irish market.”We would prefer if we had 10 Franklin Templetons, rather than one.”

In fact it seems that things might be the opposite of what Shankill Donal thinks. The NTMA very kindly publish a summary geographical holdings of Irish Bonds : the holdings of irish government bonds by non residents have FALLEN over teh last year, from 66b to 60b, from 78% to 74% of total. And this is with Franklin Templeton ploughing in. Dawson Davy Donal knows this of course, which is why he would never laud “clear-headed international investors” without caveat.

Finally of course there is the utter ignorance by Shankill Donal of diversification. No reputable or serious economist, such as Dawson Street Donal,  would urge increased home bias, or the use of domestic pension funds to purchase and buoy up government bonds (a form of financial repression). Irish pension funds should of course have some assets in all forms . And they havent done badly over the 2001-11 period – a survey showed a return per annum of 8.5%, well over the 6% global average. So whatever they are doing its not too bad.  Irish investors, including pension funds, need to be more, not less, diversified globally.

So, while its great that Shankill Donal is taking an interest and holding up a mirror to the facts, he should look up his namesake Dawson Street Dave and have a chat about whats really going on. Its not all bad news, but its not all good news, not by a long chalk….

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What have the Romans, sorry Researchers, ever done for us?

Another day another paean to applied science… well, a thinly disguised call for more money to go to engineering. Coz, they make stuff y’know, not like basic researchers or heaven help us AHSS (arts, humanities and social sciences) dabblers. After all, what have the romans, sorry, researchers ever given society…This applied-basic dichotomy (and shouldn’t it be a tricothomy, as whatever happened to translation research?) is not just false its ignorant. And people who peddle it, whether they be retired deans of engineering schools, science funders or politicians who wouldn’t know a quern from a quark are ignorant of their ignorance. It’s a rumsfeldian ignorance in not knowing that they don’t know.

One cannot apply scientific concepts blindly. Well, one can but don’t expect anything much more than a blowup. Take finance (not even a science but hey…) for an example. One could argue that two equations helped blow up the financial system (aided and abetted by a range of human behavior stretching from outright criminality to buck ignorance via political sleevenism). See for discussions on copulas Zimmer, Lee, jones, and for the BS model Hartford, Pollack and Lo (the latter emphasizing the human-ware element)

The two are the BlackScholes (which can be abbreviated correctly to BS) equation for the valuation of options and its lesser-known cousin the Gaussian Copula. Most people have heard of the first and fewer of the latter. The GC describes how series move together, a multivariate version of a correlation function.

BS models and their derivatives underlay many derivative models while the GC model was commonly used to model the likely behavior of the elements of risk in collateralized debt and mortgage obligations.  And we know how well that worked.

Here is the thing: these basic science models are old. And flawed. They are theoretical constructs, incredibly useful as theories, easy to teach to undergraduates, but ones whose n-th grandchildren are being worked on to slowly, gradually, painstakingly improve the fit of the theoretical model to the real world. The application of these towards products was I contend fatally flawed by a lack of understanding by regulators and some practitioners of how the basic science was moving.

Funding into basic science improves how we apply these. Funding into translational science (which steps between applied and basic) helps improve the feedback. Funding into applied science gives the raw material for the feedback. None is more important than the other. And for a country such as Ireland where it is both impossible to outcompete in basic science with the military-industrial complexes of the world and where there is a need for high value added jobs, this gives an unpalatable policy prescription. We need to keep funding basic research to ensure that those teaching applied and translational science are at the forefront (or at least aware of where it is). If we don’t, we end up with the production of tinkerers capable of making minor adjustments to a preset form but with little understanding of the fundamentals. Worse, we end up with state funding displacing commercial R&D via that being outsourced to the third and fourth level.  R&D is high risk and so it makes perfect sense for companies to get it done outside, especially when they can then also complain that the R&D isn’t producing marketable products fast enough.

This policy isn’t sexy – it doesn’t generate lots of quick jobs and doesn’t allow politicians to open factories and ct ribbons at call centers. But then neither did the decision by Donagh O’Malley (made against the advice of the bureaucrats) to open up second level education to all. Slow burns last longer. SFI and the government science apparatchiks need to step back, take a long view and put in place structures that support a decent basic science budget, that encourages

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Tumbleweed time in the Irish Stock Exchange

So the Irish Stock Exchange held  a conference  with EI on why companies should consider floating . As Simon Carswell says, its now time for the ISE to think long and hard about what it is it wants to be. One of the problems that bedevils the exchange is that it is no longer fulfilling one of its main roles, that of primary lister. The flow of IPO’s onto the Irish exchange is very poor: In Q2 2012 one exploration companies –Fastnet-  listed.  No companies listed in Q1 2012

A second major function of stock exchanges is to act as a price discovery mechanism. In this too the ISE is not exactly winning. I downloaded from Datastream the list of constituents of the ISEQ, and show below the number of days on which there were recorded zero volume, and the average daily turnover as a % of market capitalization. All data are for the last two years. In reading this bear in mind that the ISE trading mechanism is the Deutsche Bourse Xetra system therefore there are days when that system is open for trade but are holidays in Ireland. Leaving aside then the number of companies that show zero vol on a dozen or so days we see that for a not inconsiderable number of companies there are many many days when nothing happens…. This is hardly an effective way to discover prices for these companies and one wonders what they are doing on a listed exchange. Sure, the IPO proceeds can be put to good use but as an ongoing price discovery mechanism this isn’t working..

Name Zero Vol Percent Av daily To %
AER LINGUS GROUP 14 2.68% 0.10%
ARYZTA (DUB) 14 2.68% 0.04%
C&C GROUP 14 2.68% 0.25%
CRH (DUB) 14 2.68% 0.19%
DCC 14 2.68% 0.19%
DRAGON OIL 14 2.68% 0.02%
ELAN 14 2.68% 0.06%
GRAFTON GROUP 14 2.68% 0.15%
KERRY GROUP ‘A’ 14 2.68% 0.16%
KINGSPAN GROUP 14 2.68% 0.13%
PADDY POWER 14 2.68% 0.25%
RYANAIR HOLDINGS 14 2.68% 0.16%
SMURFIT KAPPA GROUP 14 2.68% 0.29%
UNITED DRUG 14 2.68% 0.16%
ALLIED IRISH BANKS 15 2.87% 0.05%
BANK OF IRELAND 15 2.87% 0.18%
FBD HOLDINGS 15 2.87% 0.18%
GLANBIA 15 2.87% 0.08%
INDEPENDENT NEWS & MEDIA 15 2.87% 0.13%
PERMANENT TSB GHG. 17 3.25% 0.22%
IRISH CONT.GP.UNT. 19 3.63% 0.21%
KENMARE RESOURCES 20 3.82% 0.02%
TOTAL PRODUCE (ESM) 20 3.82% 0.12%
FYFFES (ESM) 24 4.59% 0.15%
PROVIDENCE RES. (ESM) 39 7.46% 0.02%
IFG GROUP 50 9.56% 0.13%
ORIGIN ENTERPRISES (ESM) 69 13.19% 0.05%
PETRONEFT RESOURCES(ESM) 79 15.11% 0.03%
TVC HOLDINGS (ESM) 118 22.56% 0.12%
DATALEX 137 26.20% 0.16%
PETROCELTIC INTL. (ESM) 154 29.45% 0.00%
CPL RESOURCES (ESM) 158 30.21% 0.13%
ORMONDE MINING (ESM) 163 31.17% 0.03%
DONEGAL CREAMERIES (ESM) 183 34.99% 0.06%
ABBEY (ESM) 193 36.90% 0.08%
AMINEX 245 46.85% 0.01%
ICON 245 46.85% 0.01%
MERRION PHARMS. (ESM) 313 59.85% 0.04%
OVOCA GOLD (ESM) 331 63.29% 0.01%
PRIME ACTIVE CAP. (ESM) 382 73.04% 0.04%
ZAMANO (ESM) 406 77.63% 0.05%
UTV MEDIA (DUB) 450 86.04% 0.00%
CONROY GD.& 0TRES.(ESM) 490 93.69% 0.00%
FIRST DERIVATIVES (ESM) 492 94.07% 0.00%
KARELIAN DIA.RES. (ESM) 506 96.75% 0.00%

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A journal editor seeks your views…

So, I today signed off on the agreement to be the new editor of another Elsevier journal, International Review. Of Financial Analysis (IRFA). It's a pretty decent journal, ranked in the top 40 by a recent study; it was ranked as “internationally excellent” in the 2008 Aston rankings; as “highly regarded” in the 2010 Association of Business Schools journal ranking ; as “top international” in thr 2010 Cranfield School of Management list; for mere details see http://www.harzing.org with the usual caveat that rankings are not the only or even the most desirable indicator of the quality and impact of a journal.

Now, I am aware that elsevier raises the hackles of many with regard to the debate on open access versus pay walls, but that's a debate that I'd like to avoid at the present. What I am interested in is the views of people on how we might make the articles forthcoming in IRFA more accessible and interesting. elsevier have their views on the article of the future- which of these would you be interested in seeing rolled out? For example, should video abstracts be available freely viewable? Would people be interested in a twitter feed of articles? Whst about an editorial,video, of each issue? Your ideas are sought!

 

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Asset allocation in Defined Benefit Pension Plans in Europe

Mercers each year publish a DB survey, which I get a copy of.

The 2012 results are quite interesting, not least from an Irish perspective. They survey over 1300 plans, covering 600b plus assets in europe as a whole.

First, Irish plans show the highest bias towards equities of all countries. However, this equity heavy position (which we share with the UK , not surprising given our similar national cultures : see here for some research on culture and pensions) is declining over time.

Second, breaking this down in more detail, we still display a very high degree of home bias in equities, with 15% of total assets in domestic equities.  Also, reflecting the financing structure of Irish corporations, the striking lack of investment in domestic corporate bonds is also very evident. Given that across Europe as a whole 7-10% of asset allocation to these instruments is not uncommon this seems to be a potentially untapped resource for irish corporate and a useful diversifier for irish pension funds

Third, its not all gloom (well, mostly) as there are some hardy souls who plan to INCREASE exposure to euroarea perioheries.

fourth, we are not badly off when we compare Irish pension fund assets per capita to other european countries. Bear in mind however that these assets need to yield a return for possibly 25  years on retirement and you see that this is relative. Without exception europe is grossly under pension provided.

Finally, despite the bull market, despite reams of research (here, here, here ), and despite there being an increase in asset allocation towards alternative investments, pension funds are leaving diversification opportunities on teh table in the form of not going into precious metal. While this may be included in the commodities section, the likelihood is that were it a significant amount then it would be broken out. Pension fund trustees might consider if it is truly safer to invest in forestry or global macro hedge funds than gold?

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