Positive Alpha Generation: Designing Sound Investment Processes (The Wiley Finance Series)

Positive Alpha Generation......Page 4
Contents......Page 10
Preface......Page 14
1.1 Characteristics of a successful investment process......Page 16
1.2 Challenges to be solved......Page 17
1.3 Approach taken in this book......Page 18
1.4 Structure of the book......Page 19
1.5 Notation......Page 22
Part I The Value Chain of Active Investment Management......Page 24
2.1 Key success factors......Page 26
2.2 Decomposing return......Page 30
2.3 Defining risk......Page 32
2.4 The information ratio......Page 33
2.5 Fundamental law of active management......Page 34
2.6 The process of developing an investment process......Page 36
3.1 The value chain components......Page 38
3.2 Designing a value chain based investment process......Page 40
3.3 Implementing the value chain approach......Page 43
3.4 Investment processes example......Page 46
Part II Forecasting Markets......Page 50
4.1 Market efficiencies......Page 52
4.2 Understanding asset returns......Page 54
4.3 Forecasting asset returns......Page 59
4.4 Example......Page 66
5.1 Building a quantitative forecasting model......Page 72
5.2 Defining the model structure......Page 75
5.3 Handling data in parameter estimation......Page 83
5.4 Testing the model......Page 86
5.6 Example......Page 89
6 Taking Investment Decisions......Page 96
6.1 Understanding the theory of decision making......Page 97
6.2 Building a decision making process......Page 98
6.3 Example......Page 103
Part III Risk Measurement and Management......Page 106
7.1 The different dimensions of risk......Page 108
7.3 Risk from an investment manager’s perspective......Page 110
7.4 The theory behind modeling market risk......Page 111
7.5 The process of developing a risk model......Page 114
7.6 Information risk......Page 119
8.1 The volatility risk model in theory......Page 124
8.2 Selecting data for parameter estimation......Page 125
8.3 Estimating the risk model’s parameters......Page 126
8.4 Decomposing volatility......Page 134
8.5 Additional pitfalls......Page 137
8.6 Testing risk models......Page 140
9 Alternative Risk Measures......Page 144
9.1 Framework defining risk......Page 145
9.2 Alternative return distributions......Page 148
9.3 Exposure based risk models......Page 153
9.4 Nonparametric risk models......Page 155
9.6 Credit risk models......Page 159
Part IV Portfolio Construction......Page 162
10.1 Developing a modular portfolio construction process......Page 164
10.2 The mean-variance framework......Page 167
10.3 The Markowitz mean-variance model......Page 169
10.4 Alternative mean-variance based models......Page 176
10.5 Models with alternative risk definitions......Page 179
10.6 Information risk based models......Page 181
10.7 Selecting a portfolio construction approach......Page 185
11.1 Factor models and their relation to risk......Page 186
11.2 Portfolio construction exploiting idiosyncratic risk......Page 187
11.3 Pure factor model exposure based portfolio construction......Page 191
11.4 Factor sensitivity based portfolio construction......Page 194
11.5 Combining systematic and speci.c risk based portfolio construction algorithms......Page 195
12 Dynamic Portfolio Construction......Page 198
12.1 Dynamic portfolio construction models......Page 199
12.2 Dynamic portfolio construction algorithms......Page 201
12.3 A practical example......Page 206
Part V Portfolio Implementation......Page 210
13.1 Understanding transaction costs and market liquidity......Page 212
13.2 The action and context of trading......Page 217
13.3 Implementation and trading as a module of an investment process value chain......Page 220
13.4 Equity asset allocation trading approach example......Page 223
14.1 Derivative instrument characteristics......Page 228
14.2 Using derivatives to implement an investment strategy......Page 234
14.3 Example......Page 239
Part VI Investment Products and Solutions......Page 246
15.1 Benchmarks......Page 248
15.2 Passive benchmark oriented investment solutions......Page 253
15.3 Active benchmark oriented investment solutions......Page 259
15.4 Core–satellite solutions......Page 264
15.5 A sample benchmark oriented solution......Page 266
16.1 What absolute positive return can mean......Page 268
16.2 Satisfying the investor’s expectations......Page 269
16.3 The relationship between risk and return......Page 273
16.4 Long-only forecasting based solutions......Page 274
16.5 The portable alpha approach......Page 276
16.6 Combining absolute positive return and benchmark oriented solutions......Page 280
17.1 The investor’s utility function......Page 282
17.2 Portfolio insurance investment processes......Page 283
17.3 Comparing different portfolio insurance investment processes......Page 289
17.4 Managing risk......Page 291
17.5 Designing a client specific capital protection solution......Page 292
18 Hedge Funds......Page 294
18.1 Success factors of hedge funds......Page 295
18.2 Exploitable alpha generating sources......Page 297
18.3 Issues specific to hedge funds......Page 299
18.4 Developing a hedge fund investment process......Page 301
18.5 Hedge funds as an asset class......Page 304
19.1 The concept of liability driven investing......Page 308
19.2 Portfolio construction in a liability driven investment context......Page 310
19.3 Liability driven investment solutions......Page 312
19.4 A process for determining a liability driven investment solution......Page 317
Part VII Quality Management......Page 318
20.1 Performance measurement dimensions......Page 320
20.2 Setting up a performance measurement framework......Page 322
20.3 Basics of performance measurement......Page 323
20.4 Performance attribution......Page 331
20.6 The process behind the process......Page 335
20.7 Practical considerations in performance measurement......Page 338
20.8 Examples of performance measurement frameworks......Page 340
Bibliography......Page 346
Index......Page 356