The New Science of Asset Allocation: Risk Management in a Multi-Asset World

by Thomas Schneeweis; Garry ; B. Crowder; Hossein Kazemi

• ISBN13: 9780470608418
• ISBN10: 0470608412
• Format: eBook
• Copyright: 2010-02-01
• Publisher: Wiley

Summary

A feasible asset allocation framework for the post 2008 financial worldAsset allocation has long been a cornerstone of prudent investment management; however, traditional allocation plans failed investors miserably in 2008. Asset allocation still remains an essential part of the investment arena, and through a new approach, you'll discover how to make it work.In The New Science of Asset Allocation, authors Thomas Schneeweis, Garry Crowder, and Hossein Kazemi first explore the myths that plague this field then quickly move on to examine how the practice of asset allocation has failed in recent years. They then propose new allocation models that employ liquidity, transparency, and real risk controls across multiple asset classes. Outlines a new approach to asset allocation in a post-2008 world, where risk seems hidden The "great manager" problem is examined with solutions on how to capture manager alpha while limiting downside risk A complete case study is presented that allocates for beta and alphaWritten by an experienced team of industry leaders and academic experts, The New Science of Asset Allocation explains how you can effectively apply this approach to a financial world that continues to change.

Table of Contents

Preface

Acknowledgments

A Brief History of Asset Allocation

In the Beginning

A Review of the Capital Asset Pricing Model

Asset Pricing in Cash and Derivative Markets

Models of Return and Risk Post-1980

Asset Allocation in the Modern World

Product Development: Yesterday, Today, and Tomorrow

Notes

Measuring Risk

What Is Risk?

Traditional Approaches to Risk Measurement

Classic Sharpe Ratio

Other Measures of Risk Assessment

Portfolio Risk Measures

Other Measures of Portfolio Risk Measurement

Value at Risk

Notes

Alpha and Beta, and the Search for a True Measure of Manager Value

What Is Alpha?

Issues in Alpha and Beta Determination

Problems in Alpha and Beta Determination

Multi-Factor Return Estimation: An Example

Tracking Alternatives in Alpha Determination

Notes

Asset Classes: What They Are And Where To Put Them

Overview and Limitations of the Existing Asset Allocation Process

Asset Allocation in Traditional and Alternative Investments: A Road Map

Historical Return and Risk Attributes and Strategy Allocation

Traditional Stock/Bond Allocation versus Multi-Asset Allocation

Risk and Return Comparisons Under Differing Historical Time Periods

Extreme Market Sensitivity

Market Segment or Market Sensitivity: Does It Matter?

How New Is New?

Notes

Strategic, Tactical, and Dynamic Asset Allocation

Asset Allocation Optimization Models

Strategic Asset Allocation

Tactical Asset Allocation

Dynamic Asset Allocation

Notes

Core and Satellite Investment: Market/Manager Based Alternatives

Determining the Appropriate Benchmarks and Groupings

Sample Allocations

Core Allocation

Satellite Investment

Algorithmic and Discretionary Aspects of Core/Satellite Exposure

Replication Based Indices

Peer Group Creation - Style Purity

Notes

Sources of Risk and Return in Alternative Investments

Asset Class Performance

Hedge Funds

Managed Futures (Commodity Trading Advisors)

Private Equity

Real Estate

Commodities

Notes

Return and Risk Differences among Similar Asset Class Benchmarks

Making Sense Out of Traditional Stock and Bond Indices

Private Equity

Real Estate

Alternative REIT Investments Indices

Commodity Investment

Hedge Funds

Investable Manager Based Hedge Fund Indices

CTA Investment

Index versus Fund Investment: A Hedge Fund Example

Notes

Risk Budgeting and Asset Allocation

Process of Risk Management: Multi-Factor Approach

Process of Risk Management: Volatility Target

Risk Decomposition of Portfolio

Risk Management Using Futures

Risk Management Using Options

Covered Call

Long Collar

Notes

Myths of Asset Allocation

Investor Attitudes, not Economic Information, Drive Asset Values

Diversification Across Domestic or International Equity Securities is Sufficient

Historical Security and Index Performance Provides a Simple Means to Forecast Future Excess Risk-Adjusted Returns

Recent Manager Fund Return Performance Provides the Best Forecast of Future Return

Superior Managers or Superior Investment Ideas Do Not Exist

Performance Analytics Provide a Complete Means to Determine Better Performing Managers

Traditional Assets Reflect "Actual Values" Better Than Alternative Investments

Stock and Bond Investment Means Investors Have No Derivatives Exposure

Stock and Bond Investment Removes Investor Concerns as to Leverage

Given the Efficiency of the Stock and Bond Markets, Managers Provide No Useful Service

Investors Can Rely on Academics and Investment Professionals to Provide Current Investment Models and Theories

Alternative Assets Are Riskier Than Equity and Fixed Income Securities

Alternative Assets Such as Hedge Funds Are Absolute Return Vehicles

Alternative Investments Such as Hedge Funds Are Unique in Their Investment Strategies

Hedge Funds Are Black Box Trading Systems Unintelligible to Investors

Hedge Funds Are Traders, Not Investment Managers

Alternative Investment Strategies Are So Unique That They Cannot be Replicated

It Makes Little Difference Which Traditional or Alternative Indices Are Used in an Asset Allocation Model

Modern Portfolio Theory Is Too Simplistic to Deal with Private Equity, Real Estate, and Hedge Funds

Notes

The Importance of Discretion in Asset Allocation Decisions

The Why and Wherefore of Asset Allocation Models

Value of Manager Discretion

Manager Evaluation and Review: The Due Diligence Process

Madoff: Due Diligence Gone Wrong or Never Conducted

Notes

Asset Allocation: Where Is It Headed?

An Uncertain Future

What Is the Definition of Order?

Costs and Benefits

Today's Issue

Possible Governmental and Private Fund Responses to Current Market Concerns

Note

Appendix: Risk and Return of Asset Classes and Risk Factors Through Business Cycles

Glossary: Asset Class Benchmarks

Bibliography

About the Authors

Index

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