AAA Exclusive: 7 questions for Roger Ibbotson

Jul 14th, 2009 | Filed under: Academic Research, Featured Post, Today's Post | By:
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Today, we bring you the first in a series of exclusive interviews with key players in the world of alpha-centric investing.  Approximately once a month, we’ll pick someone from the pages of or from the alternative investment industry in general and pose 7 topical and straightforward questions.

By Andrew Saunders, CAIA ( Editorial Board)

Roger Ibbotson, Ph.D., is the Chairman and Chief Investment Officer of Zebra Capital, a role he has held since the firm was founded in 2001.  However, many of you will know Roger as the founder and former Chairman of Ibbotson Associates, which he founded in 1977. (He sold his interest in Ibbotson Associates to Morningstar in 2006 and is no longer an executive with the company.)

Roger is also a professor in the Practice of Finance at the Yale School of Management.  His book with Rex A. Sinquefield, Stocks, Bonds, Bills and Inflation serves as the standard reference for information on investment market returns.  He also co-authored two books with Gary Brinson, Global Investing and Investment Markets, and in 2001 completed an investments textbook with Jack Clark Francis, Investments: A Global Approach.  Roger also recently published the Equity Risk Premium with William Goetzmann and Lifetime Financial Advice with Chen, Milevsky, and Zhu.

As regular readers are aware, Ibbotson conducts research on a broad range of financial topics, including investment returns, mutual funds, hedge funds, international markets, portfolio management and valuation. He is a regular contributor and editorial board member to various trade and academic journals and has received several awards, including the Review of Financial Studies Award (Best Paper in 1992) and the Graham and Dodd Scrolls (6 times).   His publications are regularly listed in the Top Ten Social Science Research Network Download lists.

He has also served as a consultant to many companies in the financial and investment industry and has managed bond portfolios, traded equity securities, and managed asset allocation accounts.

Q1: Roger, as we approach the second year anniversary of the great quant meltdown of August 2007, how would you characterize investor familiarity, knowledge of and openness to quant strategies?

During the summer of 2007 the risk (volatility) of hedge funds doubled.  It was also a time when many strategies were highly levered and underperforming.  Since most hedged funds targeted volatility, many had to unlever at the same time. Many of the quant funds had similar holdings, which caused the meltdown as they rushed to the same exits.  During the summer of 2008, something similar happened, but this time the cause was the short selling restrictions that the government implemented in an attempt to prop up the most vulnerable companies.  Once again the quant strategies suffered.

In both cases, the quant funds that were able to stick with their strategies were able to quickly recover.  But those who targeted volatility got whiplashed.  Those who kept their leverage intact did reasonably well.  Unfortunately, many investors lumped quant funds into one big category, and have become wary of the whole group.

Q2: Are there questions that investors should ask about quant strategies but do not? More…

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  1. Interesting and thoughtful comments.

    I would add to his proposed regulation ideas the concept that, since hedge funds in some ways function as banks — taking clients’ liquid, short-term money and investing it into illiquid, long-term assets — there is a concern that investors might collectively pull back on the funds, as they did in 2007, and destabilize the entire financial system.

    The concern for breakdowns in markets and institutions (along with more general anti-fraud protections) was the foundation for 20th century banking regulation. That stabilization regime failed as banks shifted from insured, deposits-based liabilities, and one would presume that analogous regulation will be sought for other banking and banking-like situations.

    For example, a money market fund that sets a $1 NAV is acting VERY MUCH like a bank; witness the single-afternoon, > $1 Trillion run last September as evidence that markets alone are capable of causing utter failure in a rush for the exits. That Dr. Ibbotson recognizes the high costs of failure, but does not justify a reason for inaction, is curious.

  2. […] Seven questions for Roger Ibbotson.  (All About Alpha) […]

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