| |Endowments are supposed to be the smart money, yet if you review the recent exhaustive paper on return performance, you will get a different impression. Large endowments do better than small endowments but when you compare with a simple 60/40 stock bond balanced fund there is not a lot of alpha generated. See “Investment Returns and Distribution Policies of Non-Profit Endowment Funds” from ECGI … Read more Endowments need help – Performance not strong versus balanced fund
| |What is the correlation between two assets? The correlation is critical because it is the driver for any diversification decision. The better question is, “What is the correlation now, and what can it be in the future?”. Correlations are often time varying and regime specific. In bad times, correlations rise, so the diversification expected is not present when you need it. This phenomenon requires more thinking about tail risks and how to best address them … Read more Time-varying correlation – Diversification benefits are dynamic
| |Behavioral economics research has been path breaking and has truly impacted the thinking of most investors. Psychology is fundamental to human decision-making and our knowledge and understanding of economic agents has been enhanced through the large body of research in this area. Through finding exceptions and breaking down conventional utility maximization theory and wisdom, behavioral economic has advanced science, yet this work is not completely fulfilling. Our knowledge is filled with behavioral exceptions and leaves us with the impression that our decision-making skills are psychological damaged, but there is no unifying framework for how the range of biases fits within utility maximization, consumer behavior, market efficiency, and general decision-making. … Read more Behavioral economics – Is an atheoretical approach harmful?
| |A comparison of ARPs across asset classes and styles from the HFR indices shows consistency with the macro environment. We equalized the HFR ARP indices to a ten percent volatility for ease of discussion. April monthly returns are in grey while year to date returns are in red. The returns were generally lower than the market exposures, which were expected. The HFR numbers are averages and have shown significant dispersion. The low correlation across ARPs will create opportunities to improve the return to risk ratios through portfolio blending. … Read more Diverse ARP return pattern consistent with macro environment
| |Every investor has a mental model of how the world works. Some may call this their philosophy. Other will call this their belief system. These mental models form their rational expectations or rational beliefs. They are rational because they are consistent with the mental model being employed. These beliefs should be unbiased. If they are not, it requires the investor to adjust their model to eliminate the bias. … Read more Microcosm versus Macrocosm – The impact of your mental model in decision-making
- Managed Futures