Showing posts with label Modern Portfolio Theory. Show all posts
Showing posts with label Modern Portfolio Theory. Show all posts

Monday, August 20, 2012

Buffett, Leverage, Beta, and Risk (AQR)

Pensions & Investments (P&I) published an interesting article about hedge fund AQR's research about Warren Buffett's success.  AQR says that Buffett's success comes from the usage of leverage on low-beta and high-quality stocks -- along with good risk management.

In particular, P&I reports:





For the 35 years of data studied, controlling for standard equity market factors such as company size, momentum and value did little or nothing to explain Mr. Buffett's success. However, controlling for low-beta stocks and high-quality stocks (defined as companies that are profitable, growing and paying out dividends) — when applied to systematic portfolios AQR designed to simulate Mr. Buffett's investment style — did manage to account for the bulk of his outperformance, according to the paper. 


...


Betting Against Beta


led a growing number of money managers to launch low-volatility or managed-volatility strategies in recent years: that a portfolio of stocks with bottom-quartile beta can match or exceed the returns of the broader market with only a fraction of the volatility.


...



 “betting-against-beta” version of that factor — which involves going long and leveraging low-beta assets while shorting high-beta assets — can produce “significant risk-adjusted returns.”

...

AQR's argument that Mr. Buffett takes on considerable risk, meanwhile, isn't incorrect if the context is modern portfolio theory's definition of risk as a function of volatility, noted Mr. Hagstrom. However, Mr. Buffett would likely opt for his own context and argue that buying high-quality, safe stocks at low prices effectively reduces his risk rather than increases it, he added.

...


Leverage, Risk & Return



With leverage a dirty word for many pension executives struggling with crisis-level funding gaps, the fact that Mr. Buffett is “a very big user of leverage” should serve as a reminder that the returns he enjoys aren't possible “without taking a lot of risk,” Mr. Kabiller said.
One period exemplifying that willingness to take — and bear — risk was mid-1998 to Feb. 29, 2000, the final stage of the Internet bubble, when Berkshire's stock price dropped 44% even as the broad Russell 3000 index was climbing 26%, according to AQR.
Diversified Investment Vehicle
Mr. Kabiller said Mr. Buffett's skill in structuring Berkshire Hathaway as an investment vehicle may be almost as important as his skill in making specific investments. In particular, the company's insurance affiliates accrue premium payments years before the policies pay out, strengthening Mr. Buffett's ability to maintain leverage in environments where less deep-pocketed investors would have to resort to fire sales, he noted.
...
Access to Capital / Funding
... Mr. Buffett's “low-cost insurance and reinsurance businesses have given him a significant advantage in terms of unique access to cheap, term leverage.”
The float from that insurance business has provided, on average, 36% of the funding Berkshire Hathaway uses to lever up its portfolio, at a cost AQR estimates at more than three percentage points below the average T-bill rate.





Read more here:

http://www.pionline.com/article/20120820/PRINTSUB/308209983



Monday, July 4, 2011

Article on Portfolio Optimization & Alternative Assets

Here's an article one of our contributors wrote on asset allocation, alternative investments, and ETFs.


The benefits of portfolio optimization and Modern Portfolio Theory are well-documented. In this article, we review a well-balanced portfolio and several low-fee ETFs that can be used to implement the asset mix.

Of particular interest, the portfolio mix includes an ETF allocation specializing in an “alternative investment” strategy. Alternative investment strategies such as “managed futures” are gaining in popularity because they offer increased diversification benefits – due to lower correlations – versus traditional assets such as stocks and bonds.

Please read more here:

http://seekingalpha.com/article/277851-a-well-balanced-portfolio-including-alternative-investment-etf-allocation



Saturday, June 4, 2011

Introducing the ZETF (z-Trader ETF)

As our readers know, we specialize in quantitative investment strategies and alternative assets. In addition, we are specialists in asset allocation and Modern Portfolio Theory. For investors who are interested in a well-diversified portfolio, please check out the Z-Trader ETF (or ZETF).

The ZETF is tracked on the site below. The ZETF offers the following benefits:
  • Offers broad diversification to stocks, bonds, and alternative assets.
  • Uses concepts of Modern Portfolio Theory to take advantage of one of the few "free lunches" -- diversification.
  • Also applies several of our quantitative research to add value based on longer-term technical market action, valuations, and other quant methods.
  • Focuses on the lowest-fee-funds and/or funds that offer good diversification benefits.
  • Will re-balance infrequently, triggering lower commissions and fewer tax events.
  • Investable; you can use your brokerage account and auto-trade the ZETF so you can invest in the broadly-diversified ZETF portfolio, forget about it, and "sleep well at night."

Tuesday, July 20, 2010

Risk Management, Kurtosis, Skewness & Extreme Value Theory

My article at SeekingAlpha.com was published as a full-fledged article - and I am now an official "Contributor" at their website. Someone asked a few good questions that I answered on the website. I also copied it below, since I thought it was good information.
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More realistic estimate of probabilities: I like semi-deviation as an easy-to-explain measure (volatility and risk to the downside). Additional measures that help describe return distributions -- would involve calculating additional "moments" such as skewness and kurtosis (the fat-tailed distributions that many investment strategists strive for = minimize losses, fattening profits).

More on Semi-Correlation: Semi-correlation is somewhat similar to correlation, except it studies periods where certain assets decline. This can give a "true" measure of diversification during financial crises.

There is also a branch of statistics that studies the probability of big dislocations such as crashes in markets (Extreme Value Theory) - which is very interesting...

Monday, July 19, 2010

My Article at SeekingAlpha - Portfolio Optimization and Rising Correlations

Here's a link to my article at SeekingAlpha.com.

In particular, it talks about "true" diversification amidst rising correlations and the evolving world -- and some implications for portfolio optimization. I show a tool I developed that I call semi-correlation. This statistic can show which asset classes offer more "true diversification" when many assets start moving together in a financial crisis.