Editor's Letter: Chasing Performance Could be Dangerous to the Health of Your Portfolio
Hossein Kazemi
Risk Parity
Frank Benham, Roberto Obregon, Timur Kaya Yontar

Mean-variance portfolio optimization can sometimes provide results that do not make a lot of sense. In this paper, a risk parity is offered as a better solution for portfolio management. Allocating risk equally across asset classes without leverage can lead to a balanced portfolio, but one with a high allocation to bonds and returns lower than that of a traditional asset allocation. Leverage can be used to boost returns. The authors point out that while risk parity can provide a reasonable portfolio, the use of leverage relies on liquid derivatives which reduces the available universe of securities.

Long Alpha and Shareholder Activism Strategies
Sam Kavehrad

In this paper, the authors review two active hedge fund strategies: long alpha and shareholder activism. Some long-short and multi-strategy hedge fund managers are offering their long equity sleeve as a standalone long alpha product. Activist strategies are closely related to private equity strategies. Placing passive indexation at the low end of a continuum of increasing tracking error, volatility, concentration, alpha potential and fees, it is followed by traditional active strategies, and then long alpha strategies and then shareholder activism. For those that desire truly unconstrained equity management, the latter two strategies can be an effective solution.

Operational Plus Commercial Due Diligence: Strengthen the Shield Against Fraud
Jinzhu Chen

The authors of this paper view due diligence as a source of excess return. This is because the process of discovering the true value of an investment can be a source of alpha and can also prevent serious losses. Novel approaches to due diligence in opaque markets can be expensive to conduct but also can provide more value than conventional approaches. The authors present a case study that illustrates, with lesson learned, the importance of investing in operational due diligence and commercial due diligence.

Positioning for Late Cycle with Defensive Equity
Nick Alonso, Bryan Belton, Edward Qian

The authors of this paper make the case for a portfolio designed for investors that are concerned, but not entirely convinced, that the stock market bull run is about to end. To illustrate the performance across a full market cycle, they back test the portfolio performance over the period from 1995 to 2002. This period includes the boom and bust of the dot-com bubble. The portfolio is designed as a defensive equity multi-factor portfolio. The first step in the portfolio design is selecting securities with attractive quality, value, momentum and diversification scores. The second step weights these securities using a risk budgeting procedure

Machine Learning for Visual Risk Analysis and Hedge Fund Selection
Claus Huber

This paper describes how Kohonen’s Self-Organizing Maps can be applied to visualize risk and to build robust portfolios of hedge fund managers. This machine learning method projects hedge fund characteristics onto a two dimensional map according to how similar they are. To gauge whether machine learning can add value to the investment process, the study produces a self-organizing map and creates a portfolio designed to be diversified across hedge fund return characteristics. The portfolio is shown to have a smaller maximum drawdown and a higher Sharpe ratio than four benchmarks.

A Panel Discussion on Commodities
H. Kent Baker

Using a question and answer format, this discussion examines some important topics about commodities. After providing a brief historical background on commodities, the topics examined include commodity returns and performance, commodity trading with a special emphasis on energy markets, financialization, the role of technology, and current and future trends in commodities.

The CAIA Endowment Investable Index
Hossein Kazemi, Kathryn Wilkens
The List: Alternative Indices
The CAIA Association