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Abstract:
Expected alpha from active fund managers can be forecasted - as long as one is mindful of the rules of the zero-sum game of investing. Explicit forecasts are preferred over implicit forecasts because sponsors can use explicit forecasts to build optimized portfolios of managers with improved manager weighting. To make explicit alpha forecasts, the investor combines two equations derived from the fundamental law of active management. The elemental variables for the equations are the sponsor's estimate of the manager's "goodness" at beating the manager's benchmark, the sponsor's assessment of the sponsor's skill in estimating manager ability, the cross-sectional standard deviation of manager skill, portfolio breadth, implementation efficiency, expected active risk of the portfolio, and fees.

Performance Measurement and Evaluation, Manager Selection, Portfolio Management, Asset Allocation, Managing the Investment Process, Organization and Control, Investment Theory, Behavioral Finance

Abstract:
Defined-benefit (DB) pension plans are an endangered species; they are perceived as too risky and costly. But the emerging substitute, the defined contribution plan, has many shortcomings. The risk of DB plans can be controlled, first, by modeling the liability in terms of its market-factor exposures through surplus (asset minus liability) optimization. Then, sponsors may hold the minimum-risk position (a liability-defeasing portfolio) or they may move up on the efficient frontier - taking equity and other risks. The economic cost of a DB plan also needs to be managed, but it is a matter of managing the size of the pension promise; it is not an asset allocation problem.

Portfolio Management, Asset/Liability Management, Investment Policy, Risk Measurement and Management, Multi-Asset Portfolios

Abstract:
The notion of absolute return investing is spreading like wildfire. Many people believe that superior returns can be achieved by managers with strong views and little regard for benchmarks. This article attempts to define absolute-return investing and figure out whether it exists. The conclusion is that all investment returns consist of a beta part (representing the correlation of the active portfolio with one or more market benchmarks or normal portfolios) and an active alpha part. Thus, all investing is relative-return investing in which active returns are earned relative to an appropriate benchmark or mix of benchmarks.

Portfolio Management, Hedge Fund Strategies, Alternative Investments, Hedge Fund Strategies, Investment Theory, Portfolio Theory

Abstract:
By defining duration as the sensitivity of an asset's price to changes in some other variable, one may characterize any asset as having an inflation duration, Di, and a real-interest-rate duration, Dr. Unlike nominal bonds, for which Di = Dr, inflation-linked bonds, such as Treasury Inflation-Indexed Securities (commonly called TIPS), have different values for Di and Dr. Defined-benefit pension liabilities also have different values for Di and Dr. Such liabilities can be modeled as bonds (or portfolios of bonds and equities or other assets) held short. Thus, by appropriately combining TIPS and nominal bonds, a manager can build a portfolio that has the same inflation duration and real-interest-rate duration as the liability stream. Equities also have different values for Di and Dr, so the interaction of equities with TIPS and nominal bonds can be exploited in forming efficient pension portfolios-particularly in defeasing various liability streams.

Portfolio Management: Asset Allocation, Asset/Liability Management, Debt Strategies; Debt Investments: Other