Systematic Relative Strength

The Times Online reports that Brevan Howard, the UK’s largest hedge fund ($27 billion), is planning to relocate to Switzerland due to a new performance tax of 50% facing the firm. More firms are likely to follow.

Some politicians seem totally unfamiliar with the concept of elasticity, which is taught in every basics economics course. They seem to think that the imposition of higher taxes will simply result in more revenue without realizing that onerous taxes could have just the opposite impact on revenue. In economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable. It is a tool for measuring the responsiveness of a function to changes in parameters in a relative way. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. In the case of Brevan Howard, and many, many others, apparently the elasticity associated with this tax hike is greater than imagined by the politicians.

In our global economy, talent is willing to relocate to locations where business is treated more favorably. Therefore, an investment strategy should be able to do the same. We take great comfort in knowing that our global tactical asset allocation strategies are able to adapt to these changes in the flows of business from one part of the world to the other with great ease.

—-this article first appeared 9/28/2009. If anything, globalization has increased since this article was first published. Politics in Europe—or anywhere else—have the potential to impact economic growth in the US and other regions. The one thing that hasn’t changed is that money still goes wherever it is treated best. Your investment strategy should be elastic as well.