The New Science of Asset Allocation Risk

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.

Thomas Schneeweis, PhD, is the Michael and Cheryl Philipp Professor of Finance at the University of Massachusetts, Amherst and is the founding director of the Center for International Securities and Derivatives Markets. He is also the founding editor of the Journal of Alternative Investments, cofounder of the Chartered Alternative Investment Analyst Association, and a founding Director of the Institute for Global Asset and Risk Management. During his almost forty years of investment management experience, he has been associated with the development of alpha transfer and fund replication products, the creation and development of the Zurich Hedge Fund Indices and the Dow Jones Hedge Fund Benchmark Series, as well as being instrumental in the creation of the Bache Commodity Index. Schneeweis publishes widely in the area of investment management and is often quoted in the financial press.

Garry B. Crowder, JD, MBA, is a noted expert in the development and creation of multi-asset portfolio solutions and products. He has designed and implemented asset allocation solutions for leading multinational banks, insurance companies, and family offices. Crowder created and was managing partner of one of the first and largest hedge fund platforms based on managed accounts. In this capacity, he formed and led the team that created the Zurich Hedge Fund Indices and the Dow Jones Hedge Fund Benchmark Series. With over twenty years of investment experience, he is a founding Director of the Institute for Global Asset and Risk Management and has also served in managing director positions at Morgan Stanley Asset Management and Tiger Management LLC.

Hossein Kazemi, PhD, CFA, is regarded as a leader in the area of asset allocation, and has published over thirty academic and practitioner articles in the area of asset pricing and asset allocation. He is a founding partner of Alternative Investment Analytics, LLC, and White Bear Partners, LLC. Kazemi is a professor of finance at the University of Massachusetts, Amherst and is the Associate Director of the Center for International Securities and Derivatives Markets. He is the current Program Director of the Chartered Alternative Analyst Investment Association.

Preface	p. xi
Acknowledgments	p. xix
A Brief History of Asset Allocation	p. 1
In the Beginning	p. 3
A Review of the Capital Asset Pricing Model	p. 4
Asset Pricing in Cash and Derivative Markets	p. 6
Models of Return and Risk Post-1980	p. 11
Asset Allocation in the Modern World	p. 14
Product Development: Yesterday, Today, and Tomorrow	p. 15
Notes	p. 17
Measuring Risk	p. 20
What Is Risk?	p. 22
Traditional Approaches to Risk Measurement	p. 24
Classic Sharpe Ratio	p. 26
Other Measures of Risk Assessment	p. 28
Portfolio Risk Measures	p. 30
Other Measures of Portfolio Risk Measurement	p. 33
Value at Risk	p. 34
Notes	p. 37
Alpha and Beta, and the Search for a True Measure of Manager Value	p. 39
What Is Alpha?	p. 39
Issues in Alpha and Beta Determination	p. 46
Problems in Alpha and Beta Determination	p. 48
Multi-Factor Return Estimation: An Example	p. 50
Tracking Alternatives in Alpha Determination	p. 54
Notes	p. 56
Asset Classes: What They are and Where to Put Them	p. 58
Overview and Limitations of the Existing Asset Allocation Process	p. 59
Asset Allocation in Traditional and Alternative Investments: A Road Map	p. 61
Historical Return and Risk Attributes and Strategy Allocation	p. 66
Traditional Stock/Bond Allocation versus Multi-Asset Allocation	p. 70
Risk and Return Comparisons Under Differing Historical Time Periods	p. 71
Extreme Market Sensitivity	p. 74
Market Segment or Market Sensitivity: Does It Matter?	p. 82
How New Is New?	p. 84
Notes	p. 88
Strategic, Tactical, and Dynamic Asset Allocation	p. 91
Asset Allocation Optimization Models	p. 92
Strategic Asset Allocation	p. 99
Tactical Asset Allocation	p. 101
Dynamic Asset Allocation	p. 107
Notes	p. 109
Core and Satellite Investment: Market/Manager Based Alternatives	p. 110
Determining the Appropriate Benchmarks and Groupings	p. 111
Sample Allocations	p. 117
Core Allocation	p. 119
Satellite Investment	p. 120
Algorithmic and Discretionary Aspects of Core/Satellite Exposure	p. 120
Replication Based Indices	p. 122
Peer Group Creation-Style Purity	p. 126
Notes	p. 132
Sources of Risk and Return in Alternative Investments	p. 134
Asset Class Performance	p. 135
Hedge Funds	p. 139
Managed Futures (Commodity Trading Advisors)	p. 143
Private Equity	p. 148
Real Estate	p. 153
Commodities	p. 160
Notes	p. 166
Return and Risk Differences among Similar Asset Class Benchmarks	p. 167
Making Sense Out of Traditional Stock and Bond Indices	p. 168
Private Equity	p. 170
Real Estate	p. 173
Alternative REIT Investments Indices	p. 179
Commodity Investment	p. 179
Hedge Funds	p. 185
Investable Manager Based Hedge Fund Indices	p. 185
CTA Investment	p. 189
Index versus Fund Investment: A Hedge Fund Example	p. 189
Notes	p. 194
Risk Budgeting and Asset Allocation	p. 195
Process of Risk Management: Multi-Factor Approach	p. 195
Process of Risk Management: Volatility Target	p. 200
Risk Decomposition of Portfolio	p. 202
Risk Management Using Futures	p. 203
Risk Management Using Options	p. 206
Covered Call	p. 206
Long Collar	p. 208
Notes	p. 210
Myths of Asset Allocation	p. 212
Investor Attitudes, Not Economic Information, Drive Asset Values	p. 213
Diversification Across Domestic or International Equity Securities Is Sufficient	p. 214
Historical Security and Index Performance Provides a Simple Means to Forecast Future Excess Risk-Adjusted Returns	p. 215
Recent Manager Fund Return Performance Provides the Best Forecast of Future Return	p. 215
Superior Managers or Superior Investment Ideas Do Not Exist	p. 216
Performance Analytics Provide a Complete Means to Determine Better Performing Managers	p. 216
Traditional Assets Reflect "Actual Values" Better Than Alternative Investments	p. 217
Stock and Bond Investment Means Investors Have No Derivatives Exposure	p. 217
Stock and Bond Investment Removes Investor Concerns as to Leverage	p. 218
Given the Efficiency of the Stock and Bond Markets, Managers Provide No Useful Service	p. 218
Investors Can Rely on Academics and Investment Professionals to Provide Current Investment Models and Theories	p. 218
Alternative Assets Are Riskier Than Equity and Fixed Income Securities	p. 219
Alternative Assets Such as Hedge Funds Are Absolute Return Vehicles	p. 220
Alternative Investments Such as Hedge Funds Are Unique in Their Investment Strategies	p. 221
Hedge Funds Are Black Box Trading Systems Unintelligible to Investors	p. 222
Hedge Funds are Traders, Not Investment Managers	p. 222
Alternative Investment Strategies Are So Unique That They Cannot Be Replicated	p. 223
It Makes Little Difference Which Traditional or Alternative Indices Are Used in an Asset Allocation Model	p. 223
Modern Portfolio Theory Is Too Simplistic to Deal with Private Equity, Real Estate, and Hedge Funds	p. 223
Notes	p. 225
The Importance of Discretion in Asset Allocation Decisions	p. 226
The Why and Wherefore of Asset Allocation Models	p. 226
Value of Manager Discretion	p. 230
Manager Evaluation and Review: The Due Diligence Process	p. 232
Madoff: Due Diligence Gone Wrong or Never Conducted	p. 233
Notes	p. 239
Asset Allocation: Where Is it Headed?	p. 240
An Uncertain Future	p. 241
What Is the Definition of Order?	p. 243
Costs and Benefits	p. 246
Today's Issue	p. 246
Possible Governmental and Private Fund Responses to Current Market Concerns	p. 247
Note	p. 249
Appendix: Risk and Return of Asset Classes and Risk Factors Through Business Cycles	p. 251
Glossary: Asset Class Benchmarks	p. 271
Bibliography	p. 279
About the Authors	p. 285
Index	p. 287
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The New Science of Asset Allocation Risk Management in a Multi-Asset World

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