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17 posts from April 2011


Book Review: The Snowball: Warren Buffett and the Business of Life

The Snowball There’ s no shortage of Buffett books out there. For insight into his strategy, McGraw–Hill’ s 2008 edition of Benjamin Graham’ s classic Security Analysis, which features an introduction by Buffett, is the way to go. For behind-the-curtain revelations about Berkshire Hathaway’ s annual meetings, nothing beats Jeff Matthews’ s Pilgrimage to Warren Buffett’ s Omaha. But Alice Schroeder’ s The Snowball: Warren Buffett and the Business of Life gives the fullest, most nuanced picture of both the personal and professional man.

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Liquidity Level or Liquidity Risk? Evidence from the Financial Crisis

CFA InstituteAlthough generally considered safe assets, liquid stocks underperformed illiquid stocks during the financial crisis of 2008–2009. The performance of stocks during the crisis can be better explained by their historical liquidity betas (risk) than by their historical liquidity levels. Stocks with different historical liquidity levels did not experience different returns after controlling for liquidity risk. The authors’ findings highlight the importance of accounting for both liquidity level and liquidity risk in risk management applications.

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Sliced & Diced: A Taste of Structured Investments

A May 2009 report from Research and Markets of Dublin notes that “structured products are among the fastest growing investment classes in world financial markets.” Although not really an asset class, structured investment products represent an array of investment tools for retail and institutional investors. They can enhance the returns of traditional asset classes, provide exposure to hard-to-reach sectors and markets, and often mitigate investors’ risk of losing some or all of their principal.

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Another Clue to Volatility

CFA InstituteFinancial economists treat volatility as a function of investors’ responses to new information. They generally presume that if an asset class is more volatile in one geographical region than in another, it is attributable to a difference in either the local version of the asset class or the economic environment. A case study involving high-yield bond volatility in Europe and the United States suggests that cultural differences may also contribute to disparities in volatility.

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The Threat of Losing the AAA is Self-Fulfilling

On Monday, April 18, Standard and Poor’s (S&P) put the US’s sovereign rating on negative outlook. The action was prompted by the continued deterioration of the US’s fiscal imbalances and the lack of urgency with which US political leaders have approached the country’s fiscal problems. By citing that Canada, the UK, France, and Germany all have better fiscal profiles including both better financial leverage ratios and stronger political discipline to manage their countries’ finances the rating agency has signaled that the US has lost its global financial pre-eminence. Such pre-eminence has allowed it to issue bonds at a premium to comparables and have a fiat money that has served as the world’s reserve currency. The US’s reign of global financial dominance has now officially ended.

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Pushing the Threshold: New Uses for Exposures Analysis

When we began building our Security Exposures Analysis functionality, the focus was on understanding an exposure to particular criteria—what I call “thematic exposures.” For example, our clients could understand their total firm or group exposure, across every portfolio, to Japanese companies, or big oil. Since then, users have branched out into entirely new analysis methods. They have used exposures analysis to fit a variety of different settings. In all of our conversations with clients, the way people used the product suggested another approach to the analysis being performed: One that focused not on thematic exposures only but also on threshold exposures.

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How Your Family Office Can Practice Philanthropy Through Its Investment Practice

While “giving back through philanthropy” will be a key topic for discussion at NYSSA’s 3rd Annual Family Office Conference on May 10, it may be well worth noting that a number of family offices are now discovering that they can express their philanthropic goals not just by “giving back” in the traditional sense but also through their investment practices.

Stephen Viederman has first-hand experience with this innovative approach to philanthropy as the former president of the Jessie Smith Noyes Foundation, a family foundation that was one of the earliest to put its investment assets behind its mission. The practical guidance he has offered to family foundations like Noyes is equally applicable to family offices that are not explicitly “purpose-driven” but whose family members desire to deploy a significant portion of their assets for the social and/or environmental benefits of their community or for the world at large.

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The President's Counsel on Jobs and Competitiveness ... and Tax Avoidance

The NY Times report by David Kocieniewski on GE’s aggressive tax strategies under the leadership of John Samuels, a former Treasury Department tax lawyer, which enabled the company to pay no income taxes to Uncle Sam on their $5.1 billion of US-based income has many justifiably outraged.

Some, including GE on their website, are saying what GE is doing is legal so they are doing their job for shareholders. No one at GE made “the system.” They just compete in it.

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Hedge Fund Resume Rule: Dot Every “I”

EFinancialCareersWhen it comes to their attire, hedge fund professionals are able to be a lot more casual than most Wall Streeters. Shirts and slacks are the norm; suits and ties are not required.

But dressing up your resume is another matter altogether. You want to include as much detail as possible and leave very little to the imagination.

“I’d say the resumes of eight out of 10 of our candidates need some work,” advises Kyle J. Ramkissoon, principle and founding member of hedge fund recruiter IJC Partners in New York.

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Recent Research: Highlights from April 2011

The Impact of Illiquidity and Higher Moments of Hedge Fund Returns on Their Risk-Adjusted Performance and Diversification Potential.” The Journal of Alternative Investment (Spring 2011). Laurent Cavenaile, Alain Coën, and Georges Hübner.

This article studies the joint impact of smoothing and fat tails on the risk–return properties of hedge fund strategies. First, the authors adjust risk and performance measures for illiquidity and the non-Gaussian distribution of hedge funds returns. They use two risk metrics: the Modified Value-at-Risk and a preference-based measure retrieved from the linear exponential utility function. Second, they revisit the hedge fund diversification effect with these adjustments for illiquidity. Their results report similar fund performance rankings and optimal hedge fund strategy allocations for both adjusted metrics. They also show that the benefits of hedge funds in portfolio diversification persist but tend to weaken after adjustments for illiquidity are made.

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Book Review: The Intelligent Entrepreneur

TheIntelligentEntrepreneur You don’t have to be a Harvard graduate to glean wisdom from The Intelligent Entrepreneur: How Three Harvard Business School Graduates Learned the 10 Rules of Successful Entrepreneurship. Author Bill Murphy Jr. relates his 10 rules—including “find a problem, then solve it”; “think big, think new, think again”; and “persist, persevere, prevail” —to the stories of three HBS alumni who launched successful start-ups within 10 years of their graduation in 1998. However, anyone wishing to start a business can, and should, put these rules into practice.

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Do Performance-Based Fees Work?

Yesterday's post tackled regulatory matters for performance-based fees. But, how effective are those fees?

Psychologists have determined that the old carrot-or-stick method only works in certain circumstances. In the following video from the Royal Society for the Encouragement of Arts, Manufactures and Commerce, Daniel Pink (author of Drive: The Surprising Truth About What Motivates Us) explains the three factors that improve employee performance. 


Practical Issues with Performance-Based Fees

CFA Institute

Performance-based fee compensation relies on performance fee models that require specific parameters to be clearly stipulated in the fund prospectus and investment management agreement. Ambiguity in such documents has led to financial costs for funds and investors. Detailed regulatory guidance and industry standards are needed to address the practical issues related to performance fees.

Click here to read the full article


Trading on Corporate Earnings News


A study by Roll, Schwartz, and Subrahmanyam (2009) found that options trading around earnings announcements has been steadily increasing every year since 1996. Before we begin with specific trading strategies, it makes sense to get a sense of the general behavior of options around earnings announcement periods.

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Anniversary Special: Top Ten Articles from the FPP

It's been one year since NYSSA launched the FPP, and the readers have spoken: hot topics include career development, landing a job (not surprising!), behavioral finance, emerging markets, and quantitative methods. Here are the ten most popular articles from the previous year in case you missed them the first time around. If you would like to suggest new topics for the FPP to cover, please take a minute to fill out our reader survey. (Everyone who completes the survey is automatically entered in a drawing to win an Amazon Kindle and a selection of e-books from the FT Press.)

1. Five Things NOT to Do if You Want to Pass the CFA Exam
With pass rates lower than 50%, the CFA exams are daunting for even the most seasoned financial professionals. Approach the process strategically and avoid these common mistakes.

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A New Approach to Calculating Risk-Adjusted Returns

"People don’t perceive that they are going to be the one in a crash,” laments Russ Rader, media director at the IIHS (Insurance Institute for Highway Safety). “They believe that they are in control when they’re behind the wheel. They don’t sense how high the risk actually is.” The IIHS, a Virginia-based, national nonprofit that has helped significantly increase seat belt usage in the last twenty years, has a simple objective: lessen the risk taken in everyday driving behavior. The risk-measurement approach it employs has the potential to revolutionize how the investment community evaluates manager performance.

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Reputational Risk

The global financial crisis of 2007–2009 was associated with an unprecedented degree of financial and economic damage. For investors and financial intermediaries, the estimates seem to have risen to over $4 trillion or so worldwide by the time things began to stabilize, according to the International Monetary Fund (2009). Along with the financial damage has come substantial reputational damage for the financial services industry, for financial intermediaries and asset managers, and for individuals.

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