The Goal of Asset Management: Objectives, Instruments & Misconceptions

First in a series of RQSI investment commentaries on asset allocation Over the last few years, the world has suffered a banking crisis; a violent collapse in housing, equity, and commodity markets; and the destruction of more than $12 trillion in wealth. Americans have lost trillions in home equity and are paying down debt (if they can afford to). U.S. consumers, supposedly one of the two primary engines of the global economy, appear tapped out. Millions of workers are unemployed, and the unemployment rate in the United States remains near 10% (and much higher if we include so-called discouraged [...]

Portfolio Construction: Volatility & Correlation

Second in a series of RQSI investment commentaries on asset allocation In our previous paper, we discussed the advantages of investing in a straightforward, diversified portfolio of equities, Treasury bonds, and commodities. We achieved this apparent diversification by allocating 40% of our investment capital to equities, 40% to government bonds, and 20% to commodities. So, for every $1.00 we invest, we put $0.40 in the S&P 500, $0.40 in U.S. 10-year Treasury notes, and $0.20 in the Reuters-Commodity Research Bureau (CRB) Index. However, we can make several crucial enhancements to this portfolio that would improve its risk-adjusted returns across most [...]

Portfolio Construction: Volatility & Correlation part 2

Third in a series of RQSI investment commentaries on asset allocation On the popular television program “Mad Money,” Jim Cramer, a former hedge fund manager and talking head, features a segment each Wednesday called “Am I Diversified?” Callers reveal the five largest positions in their (stock only) investment portfolios, and Cramer tells them whether their portfolio contains too much concentrated risk. On an episode we viewed recently, an investor whose portfolio included shares of Google, Goldman Sachs, Raytheon, Transocean, and Caterpillar was told his investments were well diversified. Yet over the past year, these stocks have demonstrated an average daily [...]

Intelligent Market Timing

Fourth in a series of RQSI investment commentaries on asset allocation In previous white papers, we have discussed ways to intelligently capture market betas by constructing a diversified basket of assets, never relying exclusively on any single return stream. In White Paper 3, we introduced the idea of using simple market-timing tools to enhance returns, thus further reducing our portfolio’s correlation to a static market return. The example we gave was of a simple moving average, probably the most basic technical trading tool available. Using this example, we discussed the following: if an asset’s price is below the long-term moving [...]

Bringing it all together

Last in a series of RQSI investment commentaries on asset allocation How should investors allocate their capital in an uncertain world? What approach to asset allocation makes the most sense, given markets with unstable correlation and volatility structures? How are we supposed to invest? Our goal in writing this series of white papers is to help our clients and colleagues answer these questions, and to provide straightforward tools for achieving their investment goals. In previous papers, we have explained that thoughtful asset management starts with an “objective.” We believe that The Objective for all rational investors is [...]

What the Computer Does Not Know

What the Computer Does Not Know In recent years, a number of effects associated with computerized data analysis and systematic trading have entered the marketplace. There has been a substantial increase in computer power available to an increasingly sophisticated cadre of analysts and traders. Highly accurate serial price data, company fundamentals, and global economic data are readily available at low cost. The number of individuals with advanced degrees in highly technical disciplines is increasing in the industry. As a result, more and more capital is being deployed using systematic approaches applied to what is becoming common datasets. This phenomenon is [...]