In anticipation of the 68th CFA Institute Annual Conference, the editors at Institutional Investor Journals have made a selection of articles by some of our leading conference speakers available for free for a limited time.
So, before you join us in Frankfurt or follow along on social media, catch up on our speakers’ past research. The full set of articles follows below, organized by speaker. The HTML versions are available for free for a limited time, or you can download the PDF versions (also free, but registration is required).
- “High-Frequency Runs and Flash-Crash Predictability”: This article describes research into the short-term nature of movements in price data. The study’s key finding is that asset returns do not evolve at the Gaussian increments commonly assumed by continuous pricing models. Instead, prices exhibit strong autocorrelation, often resulting in predictable one-directional sequences, or runs. These runs are more pronounced ahead of market crashes. Identifying these runs can help predict impending flash crashes as much as a day before a crash. The research further contributes to asset pricing and derivatives literature by deriving discreet and continuous closed-form expressions for the probability of flash crashes.
Keith P. Ambachtsheer
- “Profit Potential in an ‘Almost Efficient’ Market” (PDF only): Most managers can make predictions that outperform the market, but fail to act on their predictions.
- “Active Management That Adds Value: Reality or Illusion?” (PDF only): We must measure actual implementation shortfall — in adversarial securities markets.
Jean L.P. Brunel, CFA
- “Goals-Based Wealth Management in Practice”: Though goals-based wealth management is certainly not a radically new discipline, it has recently assumed a more important role within the private wealth management industry. Two discrete factors probably stand behind this development: a change in client perceptions of risk after the 2008 market melt-down and the publication of the seminal piece by Das, Markowitz, Scheid, and Statman. This article starts with a review of the key issues which families typically face when dealing with wealth planning, then discusses a framework which allows advisors to consider financial, estate, and investment-planning needs, shows the practical considerations associated with the process and concludes with a brief discussion of the major business challenges that still need to be addressed.
Alexander Ineichen, CFA
- “Absolute Returns The Future of Wealth Management?” (PDF only): The author focuses on absolute return strategies as the third paradigm of active asset management. He argues that the asset management industry is about to move from its second stage into its third. The first stage was a holistic approach as individuals and institutions sought to generate returns by balancing stocks, bonds, and cash in a single portfolio. This paradigm suffered two great weaknesses: mediocre returns due to the lack of specialization and lack of manager accountability. These weaknesses were the seeds that enabled a whole new investment management industry to grow, and a shift to the second paradigm: the relative performance game, the second paradigm, which fits nicely with modern portfolio theory (MPT) and seminal academic work on performance evaluation. Fostering as this does mediocrity as opposed to meritocracy, the second paradigm led to poor performance, a strong disincentive to use risk management techniques to preserve investors’ wealth, and a focus on asset growth rather than performance. The absolute return approach, on the other hand, seeks to solve some of the issues of the relative return approach. The author then proceeds to analyze the critical feature of absolute return strategies and concludes that there is still a lot of mythology with respect to hedge funds, much of it built on anecdotal evidence, oversimplification, myopia, or simply a misrepresentation of facts.
Joachim Klement, CFA
- “Kicking the Habit: How Experience Determines Financial Risk Preferences”: Conventional explanations for the diversity of risk preferences among individual investors offer only limited insight. Recent research in neuroscience, genetics, and behavioral decision making underscore the importance of experience in financial risk taking. The authors review these findings and argue that not only does individual experience influence risk taking; so do the collective experiences of groups. Additionally, there seems to be a significant genetic component to financial risk taking, suggesting that “evolutionary experience” also needs to be considered when analyzing the risk preferences of individual investors. The authors introduce some simple tools to identify the influence of experience on financial risk preferences. These tools can help financial advisors to accurately assess investors’ risk preferences to help them achieve their goals at an acceptable level of risk.
- “Authentic Trust in Modern Business”: The authors analyze the foundations of trust in business relationships and show the importance of trust between business partners as the fundamental basis of any sustainable business. They focus on trust as the foundation of the wealth management relationship and analyze different possible actions that can be taken to establish and build trust in a relationship. But the authors also stress the dangers of using these actions as a technique to increase short-term revenues: Trust is hard to gain in practice but very fragile as well and can easily be lost. The authors demonstrate that even minor trust violations can increase doubt about the relationship and eventually harm future business. Clients increasingly demand trustworthy and authentic business partners that differentiate themselves through their actions from competitors — who may not be interested in building trusting relationships at all or may use trust only as another sales technique.
Brian D. Singer, CFA
- “Appropriate Policy Allocation for Alternative Investments” (PDF only): One of the greatest problems institutional investors face in evaluating alternative investments such as venture capital, real estate, and hedge funds is determining the normal or policy allocation. The typical approach relies on single-period optimization programs, using historical data as key inputs. This is subject to problems such as enormous allocations to private equity and other non-market-priced investments. Instead, the authors use a factor approach to build a consistent set of return and risk characteristics for conventional and alternative asset classes alike. Simulation techniques rather than optimization provide better insight into the characteristics of the portfolio over time as market swings and liquidity constraints force divergence from the desired policy mix.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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