Why Doesn’t Skill = Outerperformance?
Most professional investment managers do actually have Skill (despite what the finance academics claim) and yet many still underperform their benchmarks. Skill lies in identifying which factors are likely to have higher returns, as well as which stocks are likely to have positive alphas.
However, a portfolio’s performance will not only depend on the outcome of these deliberate bets, but also on the outcome of any other significant, but unintended bets, so managers typically seek to neutralize their portfolio’s exposure to all other factors.
The most common method for trying to neutralize unwanted sector or country bets is to ensure that portfolio weights match the benchmark weights very closely. Unfortunately, this does not necessarily ensure that the portfolio is neutral. By focusing on portfolio exposures rather than weights, active managers can more efficiently eliminate unwanted bets, and hence improve their portfolio’s performance. The talk will provide some simple examples to illustrate this point.
About the Speaker:
In 1980 Jason MacQueen founded QUANTEC, which was the first firm to develop risk models for equity markets outside the USA, and which ultimately built risk models for all of the developed and most of the emerging markets. In 1984 QUANTEC launched the first global asset allocation model, including currency hedging overlays and the first use of reverse optimisation for efficient portfolio rebalancing.
Jason also pioneered the development and use of multi-factor stock selection models in the U.S.A. and Japan, and the investment track records of his long term collaborators are exceptional. In the early 1990s QUANTEC developed the first truly global risk model and a global stock selection model, both incorporating global common factors.
In the late 1990s Jason and his colleagues developed a statistical risk model-based technique for the American Stock Exchange to enable them to offer Exchange Traded Funds (ETFs) on Actively-managed Mutual Funds without knowing the underlying holdings. This technology can also be used by enable pension funds and others to manage their overall portfolio risks without having full transparency from their external managers.
QUANTEC was sold to Thomson Financial in February 2001, and after consulting to them for two years, he co-founded R-Squared Risk Management in 2003 to develop Customised Hybrid Risk Models for institutional investors to manage their portfolio risks more efficiently. R-Squared has also developed a unique set of XRD equity risk models covering different geographies. In addition, the RSQRM XRD models can be used to estimate the sensitivity of portfolios to a wide range of macro-economic variables and commodity prices. In December 2014, R-Squared Risk Management was acquired by Northfield Information Services, where he is now Director of Research.
Since founding QUANTEC in 1980 Jason has developed the theoretical framework of Markowitz and his successors into a practical set of tools for institutional fund managers. By his passionate pleas for a disciplined and logically coherent approach to portfolio management, he has acquired an international reputation as speaker, consultant and iconoclast. He was educated at Oxford and London Universities, where he read Mathematics and Theoretical Physics.
He was the founder and first Chairman of the London Quant Group, a not-for-profit organisation established in 2007 to arrange Seminars on the practical application of quantitative investment technology, and is also a Director of the Society of Quantitative Analysts in New York.
Retired & Student Members: $18.75
Lunch will be served.
Matti von Turk, CFA
Continuing Education Committee
May 28th, 2015
12 Noon: Registration & Lunch
12:15 PM: Talk Starts
1:00 PM: Q&A starts
1:30 PM: Event Concludes
235 Montgomery St. Suite 643
SF CA 94104
This event qualifies for 1 hour of continuing education credit for CFA Charterholders.
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