Making Every Dollar Count: How Expected Return Can Transform Philanthropy

Describes the benefits and methods of a quantitative process for evaluating potential program investments -- based on benefit, likelihood of success, the foundation's contribution, and cost -- to maximize return on resources

The Nature of Alpha

We suggest an empirical model of investment strategy returns which elucidates the importance of non-Gaussian features, such as time-varying volatility, asymmetry and fat tails, in explaining the level of expected returns. Estimating the model on the (former) Lehman Brothers Hedge Fund Index data, we demonstrate that the volatility compensation is a significant component of the expected returns for most strategy styles, suggesting that many of these strategies should be thought of as being `short vol'. We present some fundamental and technical reasons why this should indeed be the case, and suggest explanation for exception cases exhibiting `long vol' characteristics. We conclude by drawing some lessons for hedge fund portfolio construction.Comment: 22 pages, 5 figures, 3 table

Fund managers - why the best might be the worst: On the evolutionary vigor of risk-seeking behavior

This article explores the influence of competitive conditions on the evolutionary fitness of different risk preferences. As a practical example, the professional competition between fund managers is considered. To explore how different settings of competition parameters, the exclusion rate and the exclusion interval, affect individual investment behavior, an evolutionary model based on a genetic algorithm is developed. The simulation experiments indicate that the influence of competitve conditions on investment behavior and attitudes towards risk is significant. What is alarming is that intense competitive pressure generates riskseeking behavior and undermines the predominance of the most skilled. --risk preferences,competition,genetic programming,fund managers,portfolio theory

A Spectral Model of Turnover Reduction

We give a simple explicit formula for turnover reduction when a large number of alphas are traded on the same execution platform and trades are crossed internally. We model turnover reduction via alpha correlations. Then, for a large number of alphas, turnover reduction is related to the largest eigenvalue and the corresponding eigenvector of the alpha correlation matrix.Comment: 15 pages; a trivial typo corrected in Eq. (43), no other change

Frontiers of finance: Evolution and efficient markets

In this review article we explore several recent advances in the quantitative modeling of financial markets. We begin with the Efficient Markets Hypothesis and describe how this controversial idea has stimulated a number of new directions of research, some focusing on more elaborate mathematical models that are captable of rationalizing the empirical facrts, others taking a completely different different tack in rejecting rationality altogether. One of the most promising directions is to view financial markets from a biological perspective and, specifically, with an evolutionary framework in which markets, instruments, institutions, and investors interact and evolve dynamically according to the "law" of economic selection. Under this view, financial agents compete and adapt, but they do not necessarily do so in an optimal fashion. Evolutionary and ecological models of financial markets is truly a new frontier whose exploration has just begun.Comment: 2 page

The Risks of Financial Institutions

Over the last twenty years, the consensus view of systemic risk in the financial system that emerged in response to the banking crises of the 1930s and before has lost much of its relevance. This view held that the main systemic problem is runs on solvent banks leading to bank panics. But financial crises of the last two decades have not fit the mold. A new consensus has yet to emerge, but financial institutions and regulators have considerably broadened their assessment of the risks facing financial institutions. The dramatic rise of modern risk management has changed how the risks of financial institutions are measured and how these institutions are managed. However, modern risk management is not without weaknesses that will have to be addressed.

Mapping Mutual Fund Investor Characteristics and Modeling Switching Behavior

Securing a mutual fund that meets investment goals is an important reason why some investors exclusively stay with a particular mutual fund and others switch funds within their fund family. This paper empirically investigates investor attitudes toward mutual funds. Our model, based on investor responses, develops an investor\u27s risk profile variable. Results indicate that regardless of whether the investors invest in nonemployer plans or in both employer and nonemployer plans, they consider their investment risk, fund performance, investment mix, and the capital base of the fund before switching funds. The model developed in this study can also assist in predicting investors\u27 switching behavior

Value-at-risk of carbon constraints : an input oriented approach of resource scarcity

The purpose of this study is to broaden the discussion on corporate enviromental risk exposure by integrating an oil scarcity factor. This broader approach can be utilized as a means of instigating a discussion on carbon risks beyond output oriented adaption and mitigation strategies. Even though the outcomes might not seem to be relevant for current economic activities, the recent discussion about oil prices affecting the global economy illustrates the future relevance of this topic; it is just a matter of time before risks related to future oil supply and endowment will emerge. --