Posts Tagged ‘management

17
May
11

Paper: ¿La teoria “lastima”?

Is Portfolio Theory Harming Your Portfolio
Abstract: 
Modern Portfolio Theory (MPT) teaches us that active equity managers who use judgment to make investment decisions won’t be able to match the returns (after fees and expenses) of blindly-invested, passively-managed index funds. Data on returns supports the theory, so it’s no surprise that investors are leaving actively managed funds in droves for the better average returns of super-diversified index strategies. Yet the reality is much murkier than we’ve been led to believe.

It turns out that the portfolio theories which inspired the creation and popularity of index funds and top-down, quantitatively-driven index-like strategies, are both flawed and impractical. There’s compelling evidence, moreover, that a subset of active managers do persistently outperform indexes. However, this important fact has been lost because we allow MPT to define the debate in its own misleading terms, tilting the field in its favor and hiding the reality about active manager performance in a complex game of circular arguments.

MPT relies on a number of unrealistic assumptions including an inaccurate definition of risk. Yet this characterization of risk sets the rules for comparing active vs. passive strategies, often causing active strategies to appear more risky and less efficient than their index counterparts. The same flawed logic is used to risk-adjust returns, biasing them downward for more active, concentrated managers, and rendering this highly important measure highly suspect. Furthermore, reliance on MPT’s measure of risk pressures active managers to super-diversify. The average active fund is thus disfigured to the point where the typical “active” manager is not very active at all, casting the fund in an unfavorable light in a beauty contest versus super-efficient index funds.

Stripping away the influence of portfolio theory involves isolating and evaluating the relatively small group of equity managers who rely heavily on judgment to build concentrated equity portfolios. Empirical data from multiple studies show that these concentrated managers, in fact, persistently outperform indexes. The implications of this statement are enormous. Concentrated manager returns present the best test of whether human judgment can add value in allocating capital, and they win, convincingly. Yet while judgment has prevailed over passive investing, few have taken notice. Most investors continue to look at average active manager returns, not recognizing that these returns are minimally influenced by judgment.

Regardless of MPT’s shortcomings on both a theoretical and empirical level, its dominating influence will not easily be dislodged. MPT is deeply woven into the fabric of our financial system, its mathematical grounding and precise answers inspire confidence. Further, its application is crucial in bringing increased scale and profitability to the financial services industry. Few want to see change. As such, common sense and judgment will continue to diminish in importance as top-down, quantitative strategies and blind diversification gain investment dollars.

An informed investor should welcome this shift. As highly-diversified strategies gain assets, inefficiencies become more prevalent because share prices are increasingly driven by factors other than fundamentals. Individual investors, seeking to exploit these inefficiencies and outperform indexes, should invest in several concentrated funds with strong track records. Managers of these funds have proven themselves adept at turning inefficiencies into strong returns for their investors, and persistence data demonstrates that past performance can indicate which managers are likely to continue to outperform. Concentrated fund returns may exhibit more volatility than indexes, but we now have proof that over the long-term, good judgment will be rewarded.

Link al Paper
21
Sep
10

Paper: Bonos y manejo activo

Gains from Active Bond Portfolio Management Strategies

Abstract:
The belief that excess returns can be achieved by correctly timing changes in yields and/or yield spreads motivates active bond portfolio management strategies. Given the rich literature linking yield spread patterns to both the business cycle and changes in short-term interest rates, we motivate and demonstrate the efficacy of simple spread-trading strategies tied to both. Using thirty-four years of fixed income returns, we demonstrate that straightforward rules would have led to superior risk-adjusted performance relative to standard fixed-income benchmarks. Furthermore, the strategies tied to short-maturity interest rates are based on the use of past information only.

Link al Paper

02
Sep
10

Paper: Mutual Fund, Tamaño y performance

How Much Does Size Erode Mutual Fund Performance? A Regression Discontinuity Approach

Abstract:
The two main stylized facts in the mutual fund literature are that funds exhibit little ability to persistently outperform their peers, but new money flows into funds with the highest past returns. The traditional interpretations of these facts are that fund managers are unskilled and fund investors are unsophisticated. Berk and Green (2004) use a model that combines skilled managers with diseconomies of scale in asset management to challenge these interpretations. They argue that more-skilled managers will manage more assets but – precisely because they manage more assets – will generate the same expected future returns as less-skilled managers. In their model, standard cross-sectional regressions of fund returns on fund size will significantly underestimate diseconomies of scale. To identify the causal impact of mutual fund flows on performance, we exploit the fact that small differences in mutual fund returns can cause discrete changes in Morningstar ratings and, thereby, cause discrete differences in mutual fund flows. The diseconomies of scale that we estimate using this regression discontinuity approach are larger than those estimated in standard regressions, but generally smaller than assumed in Berk and Green – or than are required to explain the low observed levels of performance persistence.

Link al Paper

01
Sep
10

Paper: ETNs pricing, un rompecabeza

The Indicative Value – Price Puzzle in ETNs: Liquidity Constraints, Information Signaling, or an Ineffective System for Share Creation?

Abstract:
The prices of ETNs often significantly exceed their indicative values. Since ETNs share many features in common with zero-coupon bonds, this empirical finding is unexpected. (Adopting the language of Wright, Diavatopoulos, and Felton (2010), we refer to this as the negative WDFD puzzle.) Using a sample of 93 ETNs over the period June 6, 2006 to December 31, 2009, we explore three possible explanations for the negative WDFD puzzle. We find that the puzzle is not a result of liquidity constraints. In fact, increased trading volume is mildly correlated with more extreme mispricing in ETNs. We also find that ETN prices significantly exceeding their corresponding indicative values do not possess information about the future prospects of the asset, commodity, or index tied to the ETN. Instead, we conclude that the negative WDFD puzzle is the result of (1) uninformed, return-chasing investors and (2) an ineffective current system for creating new shares of existing ETNs. To work towards eliminating the negative WDFD puzzle, we recommend that ETN issuers restructure their systems for creating new ETN shares by allowing profit-motivated investors to initiate the process of share creation as they identify extreme mispricing in the market place.

Link al Paper




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"It is hard to be finite upon an infinite subject, and all subjects are infinite." Herman Melville

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