In anticipation of this year’s CFA Institute Annual Conference, the editors at Institutional Investor Journals have made a selection of articles by seven of our leading conference speakers available for free for a limited time.
So, before you join us in Seattle or follow along in social media, catch up on their past research and immerse yourself in a unique set of authoritative perspectives on topics as diverse as hedge funds, volatility harvesting, and retirement investing. Among the standout articles: Nobel Prize Winner William F. Sharpe’s detailed discussion of the Sharpe ratio, published in the Fall 1994 edition of the Journal of Portfolio Management.
The full set of Institutional Investor Journal articles follows below, organized by speaker. They are available only for a limited time.
Clifford S. Asness
At this year’s conference, Clifford S. Asness, co-founder of and managing principal and chief investment officer at AQR Capital Management, will be speaking about 21st Century Asset Management.
The Devil in HML’s Details (The Journal of Portfolio Management): Asness and coauthor Andrea Frazzini challenge the standard method for measuring value that is used in academic work on factor pricing. The standard method uses lagged book data to calculate book-to-price (B/P) at portfolio formation. It aligns price data using the same lag, ignoring recent price movements.
- Practical Applications of the Devil in HML’s Details (Practical Applications): This article has a catchy title. Its findings are equally catchy for quantitative portfolio managers who want to pick up an extra 300 to 400 basis points of annual performance on their high-minus-low investment strategies.
- An Alternative Future, Part II (The Journal of Portfolio Management): An argument can be made that hedge funds, particularly a combination of traditional index funds and hedge funds, represent the future of investment management — but we are not there yet, for a variety of reasons. Some dark sides of hedge fund investing stand in the way. Hedge fund fees remain a contentious issue. Fees must become more rational in terms of paying for alpha versus hedge fund beta versus traditional beta. Other evolutionary changes must occur to make hedge funds more user-friendly, particularly for institutional investors.
Paul Bouchey, CFA
Paul Bouchey, CFA, managing director of research at Parametric, will be delivering a speech titled Is Smart Beta Still Smart after Taxes?
- Asset-Liability Management in Private Wealth Management (The Journal of Portfolio Management): The objective of this article is to shed light on the potential benefits of asset-liability management techniques, originally developed for institutional money management, in a private wealth management context. Bouchey and his coauthors show that much of the complexity of optimal asset allocation decisions for private investors can be captured through the addition of a single state variable — liability value — which accounts in a parsimonious way for investors’ specific constraints and objectives.
- Measuring Alpha Potential in the Market (The Journal of Index Investing): In this article, Bouchey and his coauthors formally define a measure of cross-sectional volatility, demonstrate potential uses for a set of indices that track this metric, and establish a strong, positive relationship between cross-sectional volatility and active manager dispersion.
- Volatility Harvesting: Why Does Diversifying and Rebalancing Create Portfolio Growth? (The Journal of Wealth Management): Investors have traditionally equated volatility with risk and viewed it as unavoidable. However, volatility also affects how returns compound over time, which raises the question: Is it possible to profit from volatility? The answer is a definitive yes.
Robert Litterman, a partner at Kepos Capital LP, is moderating the session >Past, Present, and Future Financial Thinking: A Conversation with Bill Sharpe. Even if you can’t attend the conference in Seattle, you can watch this session live online.
- Asset Allocation: Combining Investor Views with Market Equilibrium (The Journal of Fixed Income)
- The Active Risk Puzzle (The Journal of Portfolio Management): While almost all institutional investment funds take active risk, the amount is almost uniformly a tiny fraction of the market risk that they expose themselves to. Readily available financial engineering techniques today allow funds to separate market risk from active risk. Given the lack of correlation between the two, the optimal allocation to active risk is very sensitive to the net aggregate information ratio from active management. It makes no sense that this assumption should be virtually the same, around 0.04, for all funds. Some funds will focus on indexing to reduce costs. Others will seek to increase the amount and improve the quality of their active risk. If these developing trends continue, look for interesting implications for the asset management industry.
Lionel Martellini, professor of finance at EDHEC Business School, will speak about New Frontiers in Risk and Asset Allocation.
- Diversifying the Diversifiers and Tracking the Tracking Error: Outperforming Cap-Weighted Indices with Limited Risk of Underperformance (The Journal of Portfolio Management): A number of quantitative or fundamental weighting schemes have been shown to produce robust outperformance with respect to standard cap-weighted equity indices over long time periods. Over periods ranging from a few months to a few years, however, such alternative weighting schemes can generate substantial downside risk relative to cap-weighted indices, which would be a source of concern for most investment managers or chief investment officers. In this article, Martellini and his coauthors focus on two reasonable proxies for well-diversified, efficient frontier portfolios, namely, the maximum Sharpe ratio portfolio and the global minimum volatility portfolio.
Wade D. Pfau, CFA
Wade D. Pfau, CFA, a professor of retirement income at the American College, will be speaking about Best Practices in Retirement Planning.
- The Portfolio Size Effect and Lifecycle Asset Allocation Funds: A Different Perspective (The Journal of Portfolio Management): In this article, Pfau does not share the conclusion of previous research that the portfolio size effect soundly overturns the justification for the lifecycle asset allocation strategy. Although strategies that maintain a large allocation to stocks do provide many attractive features, the authors aim to demonstrate that a case for supporting a lifecycle strategy can still be made with modest assumptions for risk aversion and diminishing utility from wealth.
- Analyzing an Income Guarantee Rider in a Retirement Portfolio (The Journal of Retirement): Income guarantee riders for variable annuities are growing in popularity as a retirement income tool. This article explores their role in both the deferral and withdrawal stages of retirement income planning. Results explore how well income guarantees support an inflation-adjusted benefit base, as well inflation-adjusted retirement income withdrawals. By comparing income provided by a guaranteed portfolio with an unguaranteed portfolio replicating the same payments, we can obtain greater insight about the efficacy of the income guarantee. Results depend on what asset allocation choices would be made by retirees both with and without the income guarantee.
William F. Sharpe
William F. Sharpe, STANCO 25 Professor of Finance, Emeritus, at Stanford University’s Graduate School of Business, will appear at the session Past, Present, and Future Financial Thinking: A Conversation with Bill Sharpe. Even if you can’t attend the conference in Seattle, you can watch this session live online.
- The Sharpe Ratio (The Journal of Portfolio Management)
- The Symmetric Downside-Risk Sharpe Ratio (The Journal of Portfolio Management): The Sharpe ratio, a most useful measure of investment performance, has the disadvantage that it is based on mean-variance theory and thus is valid basically only for quadratic preferences or normal distributions. Hence skewed investment returns can engender misleading conclusions. This is especially true for superior investors with a number of high returns. Many of these superior investors use capital growth wagering ideas to implement their strategies, which means higher growth rates but also higher variability of wealth. A simple modification of the Sharpe ratio to assume that the upside deviation is identical to the downside risk gives more realistic results.
- “Sideways Betas”: Further Comments (The Journal of Portfolio Management)
Scott D. Welch
Scott D. Welch, chief investment officer at and co-founder of Fortigent, LLC, will be speaking about Putting Investors First: Positioning Wealth Management Firms to Understand the Client Base of the Future.
- The Hitchhiker’s Guide to Core/Satellite Investing (The Journal of Wealth Management): Although the concept of core/satellite investing is not new, most of the literature on the subject is written by academics or practitioners for other academics or practitioners. This article attempts to present the arguments for a core/satellite investing approach in a practical, nontechnical manner, the way it might be explained to a potential investor or a new client.
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