What is Portfolio Diversification?
Apollon Fragkiskos

There is considerable controversy concerning what exactly portfolio diversification is and under what circumstances is it beneficial to investors, particularly in the wake of the most recent financial crisis in 2008. This paper gathers the various approaches on portfolio diversification throughout history, placing a higher emphasis on recent developments. The goal of this paper is not to provide an exhaustive list of diversification strategies, but rather to highlight the most commonly used ones, provide the motivation behind each approach, and show how they compare with real data.

Private Equity Financing of Technology Firms: A Literature Review
Florian Schock

This paper summarizes findings from approximately 150 studies that address characteristics of private equity investments in general, and investments in technology companies in specific. The paper is structured along the private equity investment cycle and follows the successive phases of market screening and investment decision making, operative management of portfolio companies, and exiting from investments. In the technology sector in particular, private equity investors have been both praised and criticized for their impact on firm capabilities. Therefore, at some length, the paper summarizes findings in extant literature addressing the impact of private equity investment on target firm’s innovative capabilities, entrepreneurial orientation, productivity, and its ability to make long term investments in intangible assets through R&D as well as in tangible assets through capital expenditures. Where observable, I point out differences among industries as well as differences among the subsequent waves of private equity transactions in the ‘80s, ‘90s, and ‘00s.

Alternative Beta Strategies in Commodities
Daniel Ung, CAIA, Xiaowei Kang

Recent crises have highlighted the lack of diversification of portfolios constructed based on the ‘diversification’ of asset classes, and this has led to investors exploring risk-factor based asset allocation as a potential solution. While factors-based investing in equities is fairly established, there has been less discussion on how this approach can be applied to commodities. In this article, we seek to discuss the systematic risk factors that appear to exist in commodities and assess the merit of combining multiple risk factors in a portfolio.

“The Valley of Opportunity”: Rethinking Venture Capital for Long-Term Institutional Investors
Jagdeep S. Bachher, Gordon L. Clark, Ashby H.B. Monk, Kiran S. Sridhar

Investing in venture capital has been an unsatisfactory experience for many long-term institutional investors, as it has not performed in-line with their expectations for more than a decade. Consequently, many investors have been scaling back their venture commitments and, instead, have been focusing on alternative asset classes that offer the benefits associated with economies of scale. In this paper, however, we argue that venture capital still offers attractive opportunities for intrepid institutional investors. Indeed, we outline a mechanism by which institutional investors can bring venture-backed, capital-intensive companies to commercial scale and, in turn, assist in their success over the long term. Specifically, we identify an opportunity whereby institutional investors can leverage their experience in direct private equity and direct infrastructure so as to realize direct venture investing in creative ways. Rather than being held hostage to the ‘valley of death’ when investing in capital-intensive VC-backed companies, we explain why there may be a ‘valley of opportunity.’

Growing Wealth in a Complex World
Thomas Schneeweis

Growing wealth in a complex world need not be all that complex. For the average investor it is about understanding the pros and the cons of various investment actions as well as the structure of the investment world in which those actions are made. I believe that investors have a fundamental understanding of what is possible in the investment world but that they are also unsure of what they do not know. As a result, many investors rely on the investment knowledge of others who, unfortunately, often have a set of priorities that may conflict with those of the investor. In this article, I have attempted to provide a condensed review of several primary questions that are often posed by investors. Note that this article contains no math and no equations. They are not necessary. Even in a complex investment world, what is necessary is that most investors must simply take the time to understand the driving forces behind the risk and return characteristics of their investment decisions and to understand that those decisions cannot and should not be left solely to others. This responsibility is not costless; it takes a process of continuous education. The questions and answers addressed in this article hopefully will help in that process.

IR&M Momentum Monitor
Alexander Ineichen, CAIA

Risk is often defined as exposure to change. Spotting change, therefore, is important. There are essentially three approaches to change: 1. Displaying complete ignorance, 2. Having a wild guess as to what it means, or 3. Measuring it in a systematic fashion with an applicable methodology and adapting to it. The author recommends choice number 3. Momentum can be perceived as a philosophy. The author discusses the Momentum Monitor (MOM) and recommends it as a risk management tool. If risk is defined as “exposure to change,” then one ought to spot the change.