09 AUGUST 2017 An enormous body of literature touts the benefits of investing in hedge funds. A typical analysis uses aggregate indices published by Hedge Fund Research, Morningstar and others to make their case. Investors can’t invest in hedge fund indices, however, and are thus unable to monetize the purported benefits of hedge funds. Consider an analysis showing that the risk/return profile of a traditional portfolio comprised of stocks and bonds is improved with the addition of the HFR Hedge Fund Index. Investors can’t invest in the HRF Hedge Fund Index. They must invest in one or more of the 5,000 managers that comprise that index. (We leave aside here the data issues that limit the usefulness of these indices). However, selecting the right managers depends on overcoming two crippling obstacles: [...]
09 AUGUST 2017 Modern Portfolio Theory (MPT) has become the reigning paradigm for investment management over the past 30 years. Widely used by investment advisors, institutional investors, and sophisticated investors, MPT stresses the benefits of portfolio diversification, notably in the allocation between stocks and bonds. Because these two assets are supposedly uncorrelated, or have a low or negative correlation, a portfolio comprised of 60% stocks and 40% bonds (60/40 portfolio) was felt to be the “optimal” portfolio for investors. The exact mix of stocks and bonds varied depending on the age and risk tolerance of individual investors. Older and more risk averse investors [...]
20 JULY 2017 While the recent performance of hedge funds has been abysmal, the industry continues to attract assets, especially from pension funds. How do we explain this anomaly? One argument is that hedge fund performance should not be compared to the S&P 500 because hedge funds […]
28 JUNE 2017 Investors are having a tough time. Interest rates on government bonds are either very low or negative. Stock market valuation, with P/E at 22, is high. Consumer spending and business investments are low. What is an investor to do?
One answer that is gaining increasing traction is: “invest in liquid alternative investments.”
Traditional asset allocation, based on modern portfolio theory, does not provide useful conclusions. Based on the long-term bull markets in stocks and bonds, MPT models construct portfolios of stocks and bonds. Of course, these models are not able to incorporate future trends; these are viewed as extensions of historical trends. Assuming, as I do, that we are entering a new financial regime, these models are of limited usefulness.
What are liquid alternative investments?
27 JUNE 2017 Robo-advisors are set to replace financial advisors in the same way that online banking is replacing bank tellers. This rapidly growing service offers many of the functions of a financial advisor, but at a fraction of the cost. By one estimate, robo-advisors will have $2.2 trillion in assets management by 2020.
A robo-advisor is an automated, online financial advisory service that helps manage client portfolios using computer algorithms. What is under the computerized hoods of these online services? Despite differences [...]
Ezra Zask has been actively managing, consulting, teaching, advising, writing and speaking on hedge fund and investment management issues for over three decades.