William Sharpe: Institutional Asset Allocation Studies “Inferior”
Dec 20th, 2006 | Filed under: Institutional InvestingAlpha Male has just finished reading William Sharpe’s new book, “Investors and Markets“. While it’s not an easy read (think second year university microeconomics), Sharpe is always relatively accessible when compared to others of his pedigree. The book raises a number of issues that are relevant to this blog. Over the next few weeks, we will attempt to do the book justice by touching on these various intersections.
For those of you who don’t have a Nobel Prize or who have a Nobel Prize in an discipline other than Economics, don’t be turned off by the title of this book. Despite trying its best to scare people away with one of the driest titles in the history of publishing, this book is worth reading.
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[…] But how can this be?  Intuition suggests that more assets chasing the same inefficiency will eventually arbitrage- (”iron”) out that inefficiency. As Alexander Ineichen says in his new book, the market “learns” or “becomes immune” to the arbitrageur (although he does say that markets cannot be perfectly efficient). But according to Beltratti and Morana, market participants have heterogeneous utility functions (a notion also argued by Max Darnell, Joanne Hill, and William Sharpe): “The wide variety of real world investors, including noise traders and investors with heterogeneous time horizons and objectives, seems to provide plenty of opportunities for hedge funds managers to exploit: the limits of arbitrage do not seem to have been met yet.” […]
[…] And finally, he suggests (as does William Sharpe in his new book) that strategic asset allocation is a false religion… “Rather than “equity managers” competing with other “equity managers” in the investor’s equity piece of the pie, all alpha generators will compete with each other for the whole enchilada.” […]
[…] The report suggests that Modern Portfolio Theory’s need to divide the world into asset classes is behind much of this “semantic confusion”. In an apparent affirmation of William Sharpe’s contention that asset allocation studies are “inferior” (see related posting), over half of participants said that the very concept of a “policy portfolio” needed to be either revised or reinvented… […]