How Many Alternative Eggs Should You Put in Your Investment Basket?

There is some debate about how many stocks can effectively eliminate most of the unsystematic risk in an equity portfolio. Estimates range from ten to 40. Given the growing proliferation of pooled investment vehicles aimed at the UK's pension fund industry, where these pools consist of various combinations of alternative asset classes and alternative investment strategies, in this paper we investigate the limits of diversification amongst these less conventional investments. Our results indicate that 40per cent of the time series risk can be eliminated by combining eight strategies, but only a further four per cent from combining 12. We also find that an investor could reduce 60per cent of the dispersion in terminal wealth of an alternative investment basket - which is arguably what investors should really be concerned with - by combining six of these less conventional asset approaches to investment, but only a further 20 per cent by combining 15

An Evaluation of Alternative Equity Indices - Part 1: Heuristic and Optimised Weighting Schemes

There is now a dazzling array of alternatives to the market-cap approach to choosing constituent weights for equity indices. Using data on the 1,000 largest US stocks every year from 1968 to the end of 2011 we compare and contrast the performance of a set of alternative indexing approaches. The alternatives that we explore can be loosely categorised into two groups. First, a set of weighting techniques that Chow et al (2011) describe as “heuristic.” The second set are based upon “optimisation techniques,” since they all require the maximisation or minimisation of some mathematical function subject to a set of constraints to derive the constituent weights. We find that all of the alternative indices considered here would have produced a better risk-adjusted performance than could have been achieved by having a passive exposure to a market capitalisation-weighted index. However, the most important result of our work stems from our ten million Monte Carlo simulations. We find that choosing constituent weights randomly, that is, applying weights that could have been chosen by monkeys, would also have produced a far better risk-adjusted performance than that produced by a cap-weighted scheme

An Evaluation of Alternative Equity Indices - Part 2: Fundamental Weighting Schemes

In this paper we explore an alternative approach for determining constituent weights for equity indices. This approach makes use of alternative definitions of company size, and is referred to as Fundamental Indexation (Arnott et al (2005)). Based upon a data set that comprises the largest 1,000 US stocks for each year in our sample, our results show that between 1968 and 2011 the fundamental index alternatives that we consider have out-performed a comparable index constructed on the basis of the market capitalisation of the index constituents in risk-adjusted terms. Our Monte Carlo experiments show that this superior risk-adjusted performance cannot be attributed easily to luck. We also find that although the superior performance is achieved with higher constituent turnover than required using the Market-cap approach to index construction, the turnover is lower, and in some cases much lower, than required by some of the heuristic and optimised index construction techniques that we explored in our last paper. Finally, we find that although the application of a simple market-timing rule does not enhance the returns on these fundamentally-weighted indices very significantly, it does reduce the volatility of their returns and their maximum drawdown quite considerably

What impact does a change of fund manager have on mutual fund performance?

Using a unique database of UK fund manager changes over the period from 1997 to 2011, we examine the impact of such changes on fund performance. We find clear evidence to suggest that a manager change does affect the benchmark-adjusted performance of UK mutual funds. In particular we find a significant deterioration in the benchmark-adjusted returns of funds that were top performers before the manager exit and, conversely, a significant improvement in the average benchmark-adjusted returns of funds that were poor performers before the manager exit. Our use of the Carhart's (1997) four-factor model reveals that the improvement in average post manager exit performance is accompanied by a reduction in market risk, a slight reduction in exposure to small cap stocks, and an increase in exposure to value and momentum stocks. Overall, our results suggest that UK fund management companies have been relatively successful in replacing bad managers with better managers, but relatively unsuccessful at finding equivalent replacements for their top performing managers. We believe that regulators should therefore try to ensure that all efforts are made by fund management companies to inform all of their investors about a change in management

Essays on hedge fund risk, return and incentives

There is no legal or regulatory of what constitutes a hedge fund, though the generally accepted definition is that they are unregulated pools that invest in any asset class as well as derivative securities and use long and short positions, as well as leverage where the manager is compensated with a proportion of the returns. Hedge funds are not new, Alfred Winslow Jones in generally credited with the formation of the first hedge fund in 1949, however the industry remained small and relatively unnoticed for many years. In 1990, there were just 610 hedge funds managing approximately $39bn of capital, however by the end of 2007 the industry had grown to over 10,000 funds managing almost$2trn of capital. The credit crisis of 2008 which has caused hedge funds to suffer both investment losses and investor redemption means that as of the end of 2008 the industry has contracted with over 1,000 funds closing and the capital being reduced to $1.5btrn

What Does Rebalancing Really Achieve?

There is now a substantial literature on the effects of rebalancing on portfolio performance. However, this literature contains frequent misattribution between ‘rebalancing returns’ which are specific to the act of rebalancing, and ‘diversification returns’ which can be earned by both rebalanced and unrebalanced strategies. Confusion on this issue can encourage investors to follow strategies which involve insufficient diversification and excessive transactions costs. This paper identifies the misleading claims that are made for rebalanced strategies and demonstrates theoretically and by simulation that the apparent advantages of rebalanced strategies over infinite horizons give an inaccurate impression of their performance over finite horizons

Heads We Win, Tails You Lose. Why Don't More Fund Managers Offer Symmetric Performance Fees?

In this paper we use Monte Carlo simulation techniques to gauge the impact of three mutual fund fee structures on the utility of investors and fund managers: a fee fixed as a proportion of AUM; an asymmetric performance-based fee; and a symmetric performance-based fee. Our study identifies a clear 'incentive mismatch' between the best interests of investors and managers, more specifically, there is no single structure that simultaneously maximises both the investors’ and the managers’ utility. In fact, the results show that the most prevalent fee structure currently in the UK market (a fixed fee as a proportion of AUM) is generally the best structure for the manager and the worst for the investor! To verify the robustness of our results, we stress-test the model parameters, however, none of these model variations change the base results and our main conclusion. The results in this paper give rise to a natural question: "Since investors would prefer symmetric performance-based fees, why don't more fund managers offer such fees?

WSES Jerusalem guidelines for diagnosis and treatment of acute appendicitis

Acute appendicitis (AA) is among the most common cause of acute abdominal pain. Diagnosis of AA is challenging; a variable combination of clinical signs and symptoms has been used together with laboratory findings in several scoring systems proposed for suggesting the probability of AA and the possible subsequent management pathway. The role of imaging in the diagnosis of AA is still debated, with variable use of US, CT and MRI in different settings worldwide. Up to date, comprehensive clinical guidelines for diagnosis and management of AA have never been issued. In July 2015, during the 3rd World Congress of the WSES, held in Jerusalem (Israel), a panel of experts including an Organizational Committee and Scientific Committee and Scientific Secretariat, participated to a Consensus Conference where eight panelists presented a number of statements developed for each of the eight main questions about diagnosis and management of AA. The statements were then voted, eventually modified and finally approved by the participants to The Consensus Conference and lately by the board of co-authors. The current paper is reporting the definitive Guidelines Statements on each of the following topics: 1) Diagnostic efficiency of clinical scoring systems, 2) Role of Imaging, 3) Non-operative treatment for uncomplicated appendicitis, 4) Timing of appendectomy and in-hospital delay, 5) Surgical treatment 6) Scoring systems for intra-operative grading of appendicitis and their clinical usefulness 7) Non-surgical treatment for complicated appendicitis: abscess or phlegmon 8) Pre-operative and post-operative antibiotics.Peer reviewe

The Case for Integrating ESG into Fixed Income Portfolios

In this paper we investigate the possible benefits of integrating ESG considerations into fixed income portfolios. Our initial results indicated that such considerations could have had a significant impact on portfolio returns. Our more formal use of regression analysis demonstrated that the impact on returns was negligible. However, we do find tentative evidence to suggest that enhancing the ESG credentials of a portfolio can lead to a reduction in a portfolio’s tail risk