Asset Management and Institutional Investors (eBook)

Guido Abate is Assistant Professor of Financial Markets and Institutions at University of Brescia, Italy, Department of Economics and Management.Ignazio Basile (editor) is Full Professor of Financial Markets and Institutions at University of Brescia, Italy, Department of Economics and Management.Maria Debora Braga is Full Professor of Financial Markets and Institutions at University of Valle d’Aosta, Department of Economics and Political Science, and Professor at SDA Bocconi School of Management, Bocconi University, Milan, Italy. Pierpaolo Ferrari (editor) is Associate Professor of Financial Markets and Institutions at University of Brescia, Department of Economics and Management, and Professor at SDA Bocconi School of Management, Bocconi University, Milan, Italy. Roberto Savona is Associate Professor of Financial Markets and Institutions at University of Brescia, Italy, Department of Economics and Management.

Foreword 6
Contents 10
List of Contributors 14
Part I: Institutional Investors: Typologies, Roles and Products 15
Chapter 1: Institutional Investors 16
1.1 Institutional Investor Features 16
1.2 Development Factors 23
1.3 Benefits to the Financial System 24
1.3.1 Structure of Financial Systems 24
1.3.2 Strategies of Financial Institutions 25
1.3.3 Market Organisation 26
1.3.4 Regulation and Control of Financial Activities 27
1.3.5 Asset Management Industry 28
1.4 An International Comparison 29
References 42
Chapter 2: Collective Investment Vehicles and Other Asset Management Products 44
2.1 Asset Management Products 44
2.2 Collective Portfolio Management 44
2.3 Investment Funds 46
2.3.1 Investment Fund Classification 48
2.3.2 Open-End Investment Funds 54
2.3.3 The Benchmark and Investment Strategies 63
2.3.4 Restrictions on the Investment Policy 67
2.3.5 Mandatory Public Documents 69
2.3.6 Investment Fund Charges 71
2.4 Unit Trust Schemes 76
2.5 Open-End Investment Companies 77
2.6 Other Asset Management Products 79
2.6.1 Individual Portfolio Management 79
2.6.2 Investment-Oriented Insurance Policies 81
2.6.2.1 Capital Redemption Policies 82
2.6.2.2 Linked Insurance Policies 83
2.6.3 Structured Products 85
References 88
Part II: Investment Management Policy 90
Chapter 3: Stages of Investment Management Policy 91
3.1 Investment Management Policy 91
3.2 Identification of Objectives and Constraints 91
3.3 Formalisation of the Investment Policy 94
3.4 Implementation of the Financial Strategy 94
3.4.1 Strategic Asset Allocation 96
3.4.2 Tactical Asset Allocation 101
3.4.3 Stock Picking 102
3.5 Periodic Portfolio Rebalancing 102
3.6 Performance Assessment and Risk Control 104
References 108
Chapter 4: Strategic Asset Allocation with Mean-Variance Optimisation 109
4.1 Strategic Asset Allocation with Markowitz´s Mean-Variance Optimisation 109
4.2 The Assumptions of Mean-Variance Optimisation 116
4.3 Estimation Risk and Practical Problems with Mean-Variance Optimisation 122
4.4 The Application of the Markowitz Approach: An Example 131
4.5 Strategic Asset Allocation and Estimation Risk Management: An Initial Description 140
4.6 The Additional Weight Constraints Method 141
4.7 The Resampling Method 150
4.7.1 The Application of Resampling: An Example 151
4.7.2 The Properties of Resampled Portfolios 156
4.7.3 Discretionary Choices in Resampling 159
4.8 Bayesian Strategic Asset Allocation: The Black-Litterman Model 160
4.8.1 The First Information Set of the Black-Litterman Model: Equilibrium or Implicit Returns 164
4.8.2 The Second Information Set of the Black-Litterman Model: The Views 168
4.8.3 Blending Information Sets and Expected Returns in the Black-Litterman Model 173
4.8.4 The Application of the Black-Litterman Model: An Example 177
References 182
Chapter 5: Methods and Tools for Portfolio Selection 185
5.1 Portfolio Selection 185
5.2 Level of Diversification of Optimal Portfolios 186
5.3 Analysis of Portfolio Risk Using Asymmetric Measures 192
5.3.1 Value at Risk 194
5.3.2 Expected Shortfall 197
5.3.3 Maximum Drawdown 199
5.4 Constraints on Risk-Taking 201
5.4.1 The Shortfall Constraint 201
5.4.2 Constraints Based on Value at Risk 206
5.5 Analysis of Future Scenarios of the Cumulative Wealth 207
References 212
Chapter 6: Alternative Approaches to Traditional Mean-Variance Optimisation 214
6.1 Alternative Asset Allocation Approaches to Traditional Mean-Variance Optimisation 214
6.2 The Global Minimum-Variance Strategy 216
6.3 The Optimal Risk Parity Strategy 218
6.4 Portfolio Selection Under Alternative Asset Allocation Approaches 220
References 224
Part III: Performance Evaluation for Traditional Investment Portfolios 225
Chapter 7: Performance Evaluation 226
7.1 Performance Evaluation Stages 226
7.2 Return on an Investment Portfolio 227
7.2.1 Simple, Compound and Continuous Return 228
7.2.2 Arithmetic and Geometric Return 233
7.2.3 Money-Weighted and Time-Weighted Return 237
7.2.3.1 Calculating Money-Weighted Return 237
7.2.3.2 Calculating Time-Weighted Return 241
7.2.3.3 A Specific Time-Weighted Return Calculation Technique: The Unit Price Method 242
7.2.4 Gross and Net Return 243
7.3 Investment Portfolio Risk Measures 245
7.3.1 Absolute Risk 246
7.3.2 Asymmetric Risk 247
7.3.3 Relative Risk 249
7.4 Risk-Adjusted Performance Measures 253
7.4.1 The Sharpe Ratio 255
7.4.2 The Modigliani RAP 258
7.4.3 The Sortino Ratio 262
7.4.4 The Treynor Measure 264
7.4.5 The Information Ratio 268
7.5 Evaluation of Stock Picking Ability 269
7.6 Assessment of Market Timing Ability 273
7.7 Performance Persistence 276
References 283
Chapter 8: Returns-Based Style Analysis 285
8.1 The Role of Returns-Based Style Analysis 285
8.2 Methodological Aspects of Returns-Based Style Analysis 286
8.2.1 Analysis of the Accuracy of the Style Weights 291
8.3 An Empirical Application of Returns-Based Style Analysis 294
8.4 Rolling Returns-Based Style Analysis 301
8.5 An Empirical Application of Rolling Returns-Based Style Analysis 304
References 308
Chapter 9: Performance Attribution 309
9.1 Performance Attribution: Definition, Objectives and Assumptions 309
9.2 Performance Attribution using the Brinson Model 313
9.2.1 The ``Variant´´ for the Market Timing Effect 317
9.2.2 The ``Variants´´ for the Interaction Effect 319
9.3 Integration of the Currency Effect into Performance Attribution 323
9.4 Multi-Period Arithmetic Performance Attribution 329
References 331
Part IV: Portfolio Diversification Towards Alternative Asset Classes 332
Chapter 10: Portfolio Diversification Policies: Alternative Asset Classes 333
10.1 Alternative Investment Features 333
10.2 Alternative Investments from a Portfolio Perspective 334
10.2.1 Comparison with Traditional Asset Classes 336
10.2.2 Going Beyond the Mean-Variance Approach 339
10.3 The New European Union Regulations 341
References 344
Chapter 11: Hedge Funds 345
11.1 Hedge Fund Features 345
11.2 Management Strategies 347
11.2.1 Directional Strategies 349
11.2.2 Non-Directional Strategies 352
11.2.3 Management Strategies Performance 353
References 358
Chapter 12: Hedge Fund Performance 360
12.1 The Complexity of Hedge Fund Performance Measurement 360
12.2 Classical Performance Measures 361
12.2.1 Sharpe Ratio 362
12.2.2 Omega Ratio 363
12.2.3 CAPM-Based Measures 365
12.2.4 APT-Based Measures 366
12.3 Advanced Performance Measures 367
12.4 Measuring Hedge Fund Performance: An Empirical Application 371
12.4.1 Data and Preliminary Statistics 371
12.4.2 Performance Measurement 372
References 376
Chapter 13: Private Equity 377
13.1 Private Equity Features 377
13.2 Investment Vehicles 378
13.2.1 Private Equity Funds 379
13.2.2 Special-Purpose Acquisition Companies 382
13.2.3 Other Listed Vehicles of the ``Private Equity´´ Asset Class 385
13.3 Management Strategies 386
13.3.1 Venture Capital 387
13.3.2 Expansion Financing 388
13.3.3 Buyouts 389
13.4 Risk and Return Measurement 390
13.4.1 Performance Measurement Techniques 391
13.4.1.1 Performance of Private Equity Deals 399
13.4.2 Performance of Private Equity Funds 401
13.4.3 Risk in Private Equity 402
13.4.3.1 Discount-to-NAV 403
References 404
Chapter 14: Real Estate 406
14.1 Real Estate Features 406
14.1.1 Real Estate Market 406
14.1.2 Characteristics of Property and Equity Real Estate 409
14.2 Investment Vehicles 410
14.2.1 Real Estate Funds 410
14.2.2 REITs and Real Estate ETFs 418
14.2.3 Property Derivatives 422
14.3 Management Strategies 423
14.4 Risk and Return Measurement 425
14.4.1 Real Estate Value 426
14.4.2 Returns on Real Estate Investments 428
14.4.3 Risks of Real Estate Investments 430
14.4.4 Discount-to-NAV 432
References 433
Chapter 15: Commodities 435
15.1 Commodity Features 435
15.1.1 Classification of Commodities 435
15.1.2 Commodity Markets and Futures 436
15.2 Risk and Return of Commodities 440
15.2.1 Return Decomposition of Commodity Futures 443
15.3 Commodities Within the Financial Assets Portfolio 446
15.4 Investment Vehicles in Commodities 448
15.4.1 Commodity Stocks 448
15.4.2 Commodity Derivatives 449
15.4.3 Commodity Exchange Traded Products 450
References 453
Chapter 16: Currency Overlay 454
16.1 Passive Versus Active Currency Overlay 454
16.2 Passive Currency Overlay 456
16.2.1 Implementing Passive Currency Overlay 456
16.2.2 Advanced Techniques of Passive Currency Overlay 462
16.3 Active Currency Overlay 463
16.3.1 Currencies as an Asset Class 464
16.3.2 Implementing Active Currency Overlay 468
References 468