What You Need For A Job In Investment Management

When this commercial came out, I thought it was great. The fact that it starred the king of the B-Movies, Bruce Campbell (a.k.a. "The Chin") was just icing on the cake. But it's the sort of conundrum that's faced by almost every undergrad trying to get a job in the Investment Banking or Investment Management field:

"If you have it, you don't need it; If you need it, you don't have it. If you have it, you need more of it. If you have more of it, you don;t need less of it....

... The point is, if you've never had any of it -- ever, people just seem to know.

So, if you don't have it, don't try to fake it, because you will get embarrassed. So the trick is to get things on your resume that demonstrate that even if you don't have "real" experience, you at least have the personal characteristics (and some reasonably related background that make you likely to get it.

Of course, the only reason I really did this post is that I wanted to put a video of Campbell up on the blog.

If Dogbert Was a Bailed Out CEO

Some of the political theater surrounding the auto bailouts was pretty ridiculous. In particular, the kerfuffle about them taking corporate jets vs. driving vs. flying coach was a bit much.

So I thought this Dilbert cartoon was pretty good:

Diversification Across Risk Premiums

Things have been crazy lately - we have two speakers this week at Unknown University's College of Business, and I'm involved in both visits. In addition, I'm getting ready for my CFA prep class and trying to get a paper out for a conference. So, blogging has been light this week (and will probably continue to be spotty for the rest of the week).

But in the meantime, here's an interesting paper to chew on. We were recently talking about different risk premia (size, market/book, momentum, etc...) in class. This paper, "Portfolio of Risk Premia: A New Approach to Diversification" by Remy Brian, Frank Nielsen, and Dan Stefek paper that takes the idea of risk premia combines it with a equally-weighted portfolio weighting scheme across assets with exposures to the various premiums.

Traditional approaches of structuring policy portfolios for strategic asset allocation have not provided the full potential of diversification. Portfolios based upon a 60/40 allocation between equities and bonds remain volatile and dominated by equity risk. In this paper, we introduce a different approach to portfolio diversification. This approach looks at structuring portfolios using available risk premia within the traditional asset classes or from systematic trading strategies rather than focusing on classic betas such as equities and bonds. We start by reviewing the various ways of dissecting asset classes into their underlying systematic drivers or risk premia and analyze the historical risk and return patterns for a number of risk premia across asset classes. In a second stage, we illustrate empirically that correlations between risk premia have been low, offering significant diversification potential. We then confirm the benefits of diversification with a simple asset allocation case study by comparing a typical 60/40 equity/fixed income allocation with an equal weighted allocation across eleven style and strategy risk premia. From 1995 to 2008, this simple combination had returns similar to the traditional allocation but with 65% less volatility.

You can read the whole thing on SSRN here

UCONN Basketball Coach Explains Basic Economics to Reporter

It's not that often that I get to see two of my favorite topics (UCONN basketball and executive compensation) collide (and on Youtube, yet).

After a recent game, during the press conference, UCONN coach Jim Calhouh was asked a question by "freelance journalist and political activist) Ken Kreyeske, who apparently working for some outfit called “The Hartford News" . He asked Calhoun

"Considering that you're the highest paid state employee and that there's a two billion dollar budget deficit, do you think tat"

Calhoun doesn't even let him finish, and responds, "Not a dime back." He then goes on to explain that he actually makes quite a bit more than that, and that the UCONN program actually results in a significant surplus ($12 million a year) that flows back to the university.

But I love the smackdown he puts on the reporter. At one pint, he asks him, "You're really not that stupid, are you?", followed by "My best advice to you? Shut up. Get some facts and then you can talk"

For that alone, if I ever see the man (and I almost rode in his Cancer Bikeathon last summer), I'd like to shake his hand.

Here's the video. Caution: do not watch while drinking any liquids, or be prepared to clean off your monitor and keyboard):

In addition to pure entertainment value, it also raises some interesting questions or points:

• Who is in a better condition to determine whether a $1.6Million-plus annual salary for Calhoun adds value to UCONN?
• Since it's a university, and not a company, a winning basketball team also has externalities over and above the financial impact of the team
• Most executive salaries are benchmarked to the salaries of industry peers' compensation. How does Calhoun's stack up to his peers (perennial top-25 schools who regularly go to the Final Four)
• What are the likely effects of capping executive compensation (either for Basketball coaches or for executives at troubled banks)?
  

Can anyone come up with a better response to a stupid reporter's question?

HT: The Ace of Spades

A Quantitative Approach to Tactical Asset Allocation

I'm not a big fan of market timing and/or technical trading rules. From what I've seen, the empirical evidence casts a lot of doubt on their effectiveness.

But I just read a very interesting paper titled "A Quantitative Approach to Tactical Asset Allocation", by Mebane Faber. Here's the abstract:

The purpose of this paper is to present a simple quantitative method that improves the risk-adjusted returns across various asset classes. A simple moving average timing model is tested since 1900 on the United States equity market before testing since 1973 on other diverse and publicly traded asset class indices, including the Morgan Stanley Capital International EAFE Index (MSCI EAFE), Goldman Sachs Commodity Index (GSCI), National Association of Real Estate Investment Trusts Index (NAREIT), and United States government 10-year Treasury bonds. The approach is then examined in a tactical asset allocation framework where the empirical results are equity-like returns with bond-like volatility and drawdown, together with over thirty-five consecutive years of positive performance.

The paper is definitely worth discussing in class. In most investment classes, there's at least some mention of the relations between arithmetic average returns, geometric average returns, holding period returns, and volatility. The reported returns to the strategy in the paper result in arithmetic average returns that are about the same (if not slightly less) than a buy/hold strategy. However, because of the lower volatility of this timing strategy,, it yields a significantly higher geometric average (and holding period) returns

It's also a good paper for a discussion on the return patterns to a market timing strategy vs. to a buy and hold one.

So, regardless of your views on market timing, it's worth a read: a short paper, interesting results, and written from a practitioner's viewpoint, so it's an easy read - even for an undergraduate.

You can download it from SSRN here.

Ah well, enough bloggery - back to work.

The Slings and Arrows of Research

Sometimes research is not for the faint of heart.

Yesterday, I got a rejection letter on a piece I'd done with a former student. I sat on her doctoral committee (not her chair- just a member) , and this was one of her essays. It had already been rejected at a two top-tier journal, and a second-tier one. Now we send it to a lower-tier one. After all, better to have it published somewhere than nowhere.

Then I got a phone call from a second coauthor (another student who's committee I'd been on, but at another school). I'd spent the last couple of weeks putting a data set together for a project we'd discussed. Unfortunately, the initial analysis turned up a dry well - there wasn't anything remotely interesting.

So, since the approach seemed promising (although it didn't work out on this data set, we'll use it to examine another topic. We might as well use the approach that we developed, even if it didn't pan out for this data. If it turns up nothing the second time, we'll drop it.

Meanwhile, I continue onward with another study with very good results where we've done pretty much all the empirical work. At this point, we're writing up the results (and the rest of the paper) to send to a conference with a deadline is in a couple of weeks.

That's the nature of research. After a while, if you have a number of projects going on simultaneously (and papers under review), you'll have some that turn out well and some that go up in smoke. The secret is to enjoy the successes and not get too upset about the rejections and dry wells and keep rolling.

The law of large numbers works pretty well in research - have a large enough number of things going on, and something will hit. And no one will care about your failures- only the ones that pan out.

Our New Travel Plan

Unknown University is going through some budget cuts. Since I'm planning on going to the upcoming Eastern Finance Association meeting in April, I checked out our university's current travel plan. It didn't look too good:


Ah well - everything old is new again. In college I hitchhiked 17 miles to campus each way for several years. I don't recall any alleged killers, but I did meet a lot of people who offered me weed (or more often, asked me if I had any). This includes memorable one time I got picked up by a 250 pound, muscle-short wearing, fu-manch wearing, bald-headed biker driving a Crown Vic late 70 model) with a Harley strapped to the back. I was hitching from Northeast Connecticut to the Rutgers campus to chase teh latest object of my misguided affection. By the time I got there (he was driving right by the campus by happy coincidence), I was woozy and had the munchies from the second-hand smoke (I no longer partook by that point - I'd gotten my crazy on earlier than most and got it out of my system)

On another occasion I also hitched 200 miles to see my best friend's wedding. I missed the wedding, but made the reception. I made quite an impression when I asked the mother of the bride (my friend' bride was a preacher's daughter, and my friend a preacher's son) if I could use her shower because "I'd been hitchhiking through rural Vermont for 6 hours, and I probably smell bad". After my friend explained that I wasn't crazy (well, at least not too much, even if I did smell bad), they agreed and I changed into the spare clothes I'd brought for the reception. And it was worth the trip.

Those were the days when we really brought teh crazy. Had a lot of fun, too. I still do, but in a much more laid back way.