A Financial “Period of Enlightenment”
Jan 9th, 2007 | Filed under: CAPM / Alpha Theory, Institutional InvestingThis is the second of three postings we plan on Alexander Ineichen’s new book Asymmetric Returns. In it, Ineichen argues that alpha is the result, not of security-selection per se, but of downside risk mitigation. Ineichen argues that we are experiencing a “paradigm shift” or “period of enlightenment” in asset management. So if you like this blog, you’ll love this book.
According to Alexander Ineichen, creating alpha is all about creating option-like (asymmetric) return profiles at lower-than-option prices. To prove his point Ineichen compares several hedge fund strategy indices to hypothetical capital guaranteed structured products that, by design, also have asymmetric return profiles. He then poses the question, “If the asymmetric return profiles advocated in this book can be obtained passively, why pay an active fee?”
Ineichen’s conclusion: “…active risk managers need not worry any time soon” about being replaced by simple structured products. (Professor Harry Kat, who argues that hedge funds can be closely approximated by dynamic (passive) trading strategies, might argue otherwise):
“Structured products offer asymmetric return profiles that suit the loss-aversion properties of investors. However, the cost of these products narrows their return significantly. There is no alpha in those products. They typically lie below the capital market line, not above.”
In case his point is not clear to the reader by the half-way mark in his book, he cuts to the chase in Chapter 5, actually calling it “Alpha is an Option”. This chapter - and its appendix - contain a number of interesting notions of alpha…
To continue reading this article please login (at the right) or click here to learn more about accessing our archives.
[…] A Financial “Period of Enlightenment” […]
[…] With their perfectly-timed trains and neatly-arranged homes, the Swiss are big fans of symmetry. This makes UBS’s resident hedge fund guru Alexander Ineichen all the more of an anomaly. His book Asymmetric Returns has been garnering a lot of attention not because it espouses order and regularity, but because it so vocally challenges the status quo, refutes conventional wisdom and, well, questions symmetry itself. […]