Despite the popularity of multi-asset strategies, especially after the global financial crisis in 2008, very few books have been written about the topic. The few books available, with their heavy use of mathematical formulas, are intended mostly for quants. There appears to be a void in terms of a multi-asset investing book for the majority of investors. This book is our attempt to fill that void.
When we first discussed this project with Paul Smith, CFA, president and CEO of CFA Institute, Paul’s advice was that we should aim to produce the book on the subject, not just a book. This is our first attempt at achieving that goal.
We focused on three features in putting this book together: (1) concise: each chapter is short enough to be read in 15–20 minutes, (2) accessible: the book is written in plain English and is entirely formula-free, and (3) authoritative: we have engaged the help of some of the brightest minds in this area from around the world. If our readers think we have succeeded in these three endeavors, we shall be quite content.
This book is about both concepts and practices in multi-asset investing. Part I focuses on two important concepts. Part II includes a few institutional case studies.
Chapter 1 sets the stage for the entire book. It explains the types of products under the multi-asset umbrella, highlighting how (properly managed) multi-asset-strategy products are different from the more traditional balanced funds and funds of funds.
In Chapter 2, Jason Hsu and Phillip Wool discuss how risk factor allocation can add value for investors who use asset classes in their asset allocation analysis. Although quants may find talking about this concept challenging without formulas, the two authors do just that. For the more quantitatively inclined, references to the more advanced papers are included.
In Chapter 3, Brian Singer, CFA, examines the role of both dynamic asset allocation (DAA) and tactical asset allocation using his overall investment taxonomy. DAA is a challenging topic, and a significant number of investors confuse it with market timing. Brian disputes that misperception, citing authorities ranging from John Maynard Keynes to Gary Brinson.
We dedicate Chapter 4 to risk parity, given its popularity among investors. Greg Allen analyzes both the theory and the historical performance of risk parity and provides a balanced and convincing assessment of the strategy.
Risk factor allocation has long been the domain of academics and quants. The Morningstar Style Box is an intuitive illustration of how average investors can put the concept to use in their daily investing. In Chapter 5, Jeff Ptak looks under the hood and gives readers an overview of both the methodology and the application of this useful tool for retail investors.
The last three chapters focus on real-life investor stories: A prominent Asian sovereign wealth manager and two veteran portfolio managers share their experiences in managing multi-asset portfolios.
A key theme that we try to convey is that all roads lead to Rome. There is no single “best” or even “right” way to manage multi-asset strategies. And getting started does not require that you possess all the needed skills (of course, the more edge you have, the more likely you are to succeed).
In Chapter 6, three GIC senior executives present GIC’s well-structured approach. GIC’s focus on the long term is an important feature and is appropriate given the long-term nature of its portfolio. GIC’s risk-and-return targets clearly reflect its emphasis on growing purchasing power over the long run.
Chapter 7 consists of an interview with Dennis Stattman, CFA, a veteran portfolio manager at BlackRock. Dennis started managing global asset allocation funds as early as 1989 and is a true pioneer in the field. He goes into the details of how he manages the products as well as how he has performed over the years. We believe the conversation to be deeply rewarding and hope our readers agree.
The book’s final chapter comprises a conversation with Ben Inker, CFA, a longtime portfolio manager at GMO who took over asset allocation products from Jeremy Grantham, the famed founder of the firm. Ben has a rather unique approach to investing, in general, and multi-asset strategies, in particular, that is rooted in both economic analysis and fundamental analysis and is implemented with a quantitative flair.
The Doklam standoff between India and China continues to attract daily press coverage although the rhetoric of escalation & war has been reduced significantly in past few days.
We take a game theory approach to evaluating this standoff that has been debated from strategic, political and economic angles.
While a few commentators have published on game theory aspects of the dispute but approach has been fairly basic using Prisoners dilemma game to evaluate the strategic options available to both countries. The standoff can be better modelled as a game of hawk-dove where there is no particular equilibrium and assumption is that cost of war is higher than the reward associated with the win.
Prisoner's dilemma game
The simplest, prisoner's dilemma game can be modelled by assuming that both the countries have two strategies - Stay or Attack. Payoffs in the game are structured in a way that the Stay option for both countries yields the highest payoff while if both countries Attack the resulting payoff is the lowest. In case China Attacks and India Stays (or Retreats) the pay off for China is higher and vice versa in case India Attacks and China adopts Stay strategy. The matrix of payoffs is provided below (numbers are purely used to denote an ordinal ranking of strategies ):
|INDIA||Stay||4, 4||0, 5|
|Attack||5, 0||0, 0|
While the game has two strategies but as the Attack strategy is the dominant strategy the game has a sub-optimal Nash equilibrium (Attack, Attack with 0,0 as payoffs). Adopting an attack strategy will always give higher or equal payoffs to a player in the above game (irrespective of what other player is doing) and as both players adopt the Attack strategy the resulting Nash equilibrium is sub-optimal.
Ideally, if both players cooperate then a Stay, Stay option with higher payoffs (4, 4) is Pareto optimal. A prisoner's dilemma game is structured in a way that the reward from a victory is higher than the cost of a war. As a result Attack strategy becomes the preferred strategy. However, we believe that cost of war is higher in this case than the gains of victory.
A Hawk-Dove game used more in evolutionary biology is a better reflection of the current standoff at Doklam.
In this game, the payoffs are structured in a way that the cost of attack (or war) is always more than the value of the payoff. Evaluating the payoffs from an India-China perspective we find that controlling a rump of land high up in Himalayas might yield some national pride for both countries and also send signal of their strength to other countries in the region but the costs will include another few decades of hostility & distrust and certain amount of trade and investment embargoes that will result in event of a war. The costs, therefore, are higher than the reward.
The game is structured as follows:
|Strategy||Attack (Hawk)||Stay (Dove)|
|INDIA||Attack (Hawk)||-2, -2||4, 0|
|Stay (Dove)||0, 4||2, 2|
Unlike the prisoner's dilemma, the above game has no dominant strategy and hence no dominant strategy equilibrium.
There two possible nash equilibria are (Attack, Stay and Stay, Attack) where the first player does opposite of what he expects the other player will do. So if India expects China to attack with certainty then it should simply retreat and the same applies to China.
Only when both players are convinced that other will remain a Hawk will the game collapse to Stay, Stay strategy option! India and China are trying to convey the very same message to each other and also to the world. China by maintaining that India has entered into its territory while India maintains that this particular piece of tri-junction involving India-Bhutan-China is a disputed territory & also critical to its national security. The actual game is structured as follows:
|Attack (Hawk)||Stay (Dove)|
|INDIA||Attack (Hawk)||(V/2 - C), (V/2 - C)||V, 0|
|Stay (Dove)||0, V||V/2, V/2|
Here V is the value of the payoff while C is the cost of war. C>V (cost of war higher than the value of payoff) is the critical assumption and therefore V/2-C has a negative value. The probability of either player playing the hawk option, therefore, becomes V/2C and of playing dove is the complement of it (1-V/2C).
Another form of the above is called a game of chicken where each driver in a car is racing towards the other and each has to decide whether to go straight ahead or swerve at the last moment. Again each player will adopt a strategy opposite of what the other player is doing. For e.g. if India is certain that China will attack it would pay to swerve away while if China is certain that India is going straight and crashing it will swerve away.
One way out is for any of the players to pull off its steering wheel thereby convincing the other that it has no choice left in which case the other player will swerve away.
Currently, both the countries are trying to convince the other that it has pulled out its steering wheel. When both players are convinced that the other player will not chicken-out the game will result in a Stay, Stay outcome.
As the time elapses, the Doklam standoff is appearing like a protracted standoff that will take a while to resolve. If history is any indicator then once can recall the Sumdorong Chu standoff between India & China that occurred in 1986 where troops were amassed by both countries and war noises were made by China but eventually after close to a year a breakthrough was achieved and troop levels were very slowly scaled down.
View more at https://www.smartkarma.com/profiles/vinay-patel
Financial Technology (FinTech) is here – sweeping through finance and, if some are to be believed, threatening traditional edifices that have stood for centuries.
This great surge is being fronted by a host of new start-ups taking their lead from the big tech innovators. Their maverick approach is helping to push the FinTech industry into new territory across the financial services landscape, raising billions of dollars and worrying the incumbents.
So what are the main trends and driving forces shaping FinTech today? Fintech – transforming finance explores the features of this new landscape, highlighting the many ways in which this revolution is taking place.
For professional accountants, this new terrain will provide many opportunities as it permeates deeper and deeper into the fabric of society. From the promise of blockchain, to the demands of valuation in a digital era, finance more than ever needs an experienced, knowledgeable guide to make the most of the opportunities ahead.