Beruflich Dokumente
Kultur Dokumente
by Alexander M. Ineichen
John Wiley & Sons 2007
352 pages
Focus
Leadership & Management
Strategy
Sales & Marketing
Finance
Human Resources
IT, Production & Logistics
Take-Aways
Asymmetric returns are those in which the gains are disproportionate to the
possible losses. The probability of profit is greater than the probability of loss.
The search for asymmetric returns will shape the future of asset management.
Hedge funds are absolute-return investment vehicles; they will be significant in
the future of the asset management industry.
Career Development
Traditionally, experts have measured investment risk rather than managing it.
Small Business
Hedge fund risk management is more subjective and less transparent than risk
control in traditional investing.
Investors must balance their desire for transparency against the fund manager's
need for freedom of action.
Applicability
Innovation
Style
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This summary is intended for the use of CFA Institute members and employees
Relevance
What You Will Learn
In this Abstract, you will learn: 1) What absolute-return investing is; 2) Why hedge
funds and the search for asymmetric returns may represent the future of the asset
management business; and 3) How to think about risk in the context of this financialindustry evolution.
Recommendation
The main theme of this dense book is the future of the asset management industry.
Alexander M. Ineichen claims that the investment business has undergone a paradigm
shift, away from buy-and-hold and toward absolute-return investing. He explores the
origins and implications of this shift in considerable detail and enjoyable prose. But,
beware, this is not a book for beginners or generalists. Even close students of finance may
find it difficult to follow the authors argument through his many detours and tangents
(interesting as they are). Ineichen is an ardent fan of high-risk, high-leverage hedge fund
investing, so his book will be controversial in the post-subprime-crisis atmosphere, where
that kind of investing has fallen from grace. Ineichen quotes John Maynard Keynes as
saying, When circumstances change, I change my view. What do you do? Published
in 2007, the book references the equity market bubble of 1995 to 2000 as the most recent
instance of large-scale market inefficiency, but getAbstract wonders whether the author
would change his view after the much more consequential financial collapse of 2008.
Abstract
The argument of
this book is that
the absolutereturn approach
is the preferred
investment
philosophy and
that asymmetric
returns are the
implementation
thereof.
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The
distinguishing
feature of an
absolute-return
approach is
that it gives
priority to capital
preservation.
transparency suffers. Traditionally, risk has been measured rather than managed. Risk
measurement is more or less objective and thus transparent, but it bears the danger of
purely rule-based management. Risk management, in contrast, is subjective. The
hedge fund business uses various approaches to risk management. As a general rule,
flexible dynamism is preferable to static dogmatism. Investors need to balance their
desire for transparency against the managers need for freedom of action.
For compounding
capital negatively,
no external help
is required. Most
investors can do it
on their own.
What has
changed is not
risk itself but
how investors
perceive risk.
There is no return without risk Only risk takers can expect to reap returns.
Be transparent Risk should be clear and understandable.
Seek experience People manage risk; models dont.
Know what you dont know Test your assumptions.
Communicate Discuss risk.
Diversify This will allow more steady returns.
Show discipline Persevere and dont let passing events sway your judgment.
Use common sense Note that being about right beats being exactly wrong.
Return is only half the equation Think of return only in the context of risk.
Investors who entrust their funds to relative-return managers have a reasonably clear
idea of their asset allocations and market risks. Investors should not seek or expect those
advantages from an absolute-return manager. Their focus should be on the managers
risk-management skills, not on the risk-measurement scales. The successful risk manager
must be able to see when the risk/reward profile starts to shift, and must have a good
exit strategy and be able to implement it. This kind of skill is expensive and, until recent
Asymmetric Returns
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Delivering
absolute returns
to investors on a
sustainable basis
is difficult. It
requires active risk
management.
Long-term
investors cannot be
indifferent to shortterm volatility.
A 10-year
investment of $100
that is flat in the
first year and then
compounds at 8%
will end at $200. A
10-year investment
of $100 that falls
by 50% in the
first year and then
compounds at 8%
percent will end
at $100.
years, only a small fraction of investors put money into hedge funds. However, hedge
fund investing has become a great deal more popular. In the past, hedge fund managers
tended to be extraordinarily good risk managers. Increasing demand for hedge fund
investments may create opportunities for mediocrity that could threaten the shift to
asymmetric returns in the asset management industry.
Transition
The financial-services industry is anything but neat and tidy. After the dot-com bubble
burst, perceptions of risk changed. Until recently, the efficient-market hypothesis
and modern portfolio theory shaped the way most market participants looked at risk.
Many people believed that outstanding success at investing was a matter of random
luck. However, skill at managing risk and adjusting to change outweigh luck. A skilled
manager can use arbitrage to combat inefficiencies in the market, providing that the
problems are not too big such as the massive market inefficiencies of the 1995-2000
bubble. In such battles, managerial flexibility matters more than the market inefficiencies.
Absolute-return investing requires a high degree of adaptability.
Conventional wisdom is that risk decreases with time. Over long time periods, volatility
diminishes and returns tend to balance each other. However, the notion that long-term
developments will overcompensate for short-term volatility is faulty. A sharp drop in
one year can annihilate five years of capital compounds. Viewed from the perspective of
possible loss, time magnifies risk, because the potential for loss increases. The question
of whether time increases or decreases risk hinges on the definition of risk. Good risk
managers think probabilistically about risk. They recognize the uncertainty of knowledge
and question what they think they know.
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Risk management
is at least as much
a craft as it is
a science.
Investors will encounter other unorthodox explanations of market behavior, though some
critics call these alternative approaches unscientific or voodoo science. Consider:
Praxeology This approach focuses on what human beings know a priori; it
denies the authority of observation and experiment as a means of discovering the
laws of economics.
Reflexivity In his approach, George Soros dismisses conventional assumptions
that the market strives for equilibrium, that perfect competition optimizes resource
allocation and that monetary and real phenomena are connected in a reflexive
fashion. Instead, Soros teaches that market participants expectations about future
developments shape market prices, which, in turn, shape future developments.
Most of academic
finance is teaching
that you cant
earn 40% a year
without some
risk of losing a
lot of money. In
some sense, what
happened is nicely
consistent with
what we teach.
[ William Sharpe
on the
LTCM collapse]
Idiosyncratic Risk
Risk is involved in every investment, indeed in every business. This risk can be systematic
or nonsystematic. The latter appears as an idiosyncratic characteristic of a particular
company or fund. Idiosyncratic risks emerge even in so-called risk-free investments.
Compare, for example, a government bond from Iceland to one from the U.S. One is
riskier than the other. Although investors can diversify to eliminate idiosyncratic risks,
it remains relevant. Some institutions, such as Enron or LTCM, were so large that their
idiosyncratic risk affected even the most-thoroughly diversified investors. Probability is
the metric that allows investors to compare idiosyncratic risks. By this measure, stock
funds are riskier than hedge funds.
The Business of Asymmetry
The hedge fund, or absolute-return, business is a growth business. It has been growing
since the year 2000. Investors seem to have accepted the notion that long-only investing
is risky and that hedge funds are, perhaps, less risky. Many of the best and brightest
investment professionals are setting up hedge funds. Yet, one does not hear about such
hedge fund managers moving in the other direction. The default of a major hedge fund
could cause serious risks throughout the financial system, as happened in 1998, but it
is quite improbable.
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