Chasing Your Tail
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Date: 10-13-2008
Start Time:
6:00pm
End Time: 7:30pm
Speaker: Andrew Weisman, Patel Weisman
Location: 412 Schapiro CEPSR, Davis Auditorium
ABSTRACT
We focus on the development of a portfolio construction framework that integrates intuition with relevant financial engineering in the presence of tail events and short track records. We discuss two sample frameworks that address most known challenges in portfolio construction. The first framework accommodates non-normality, extreme co-movements, and drawdown related risk measures. The second framework addresses additional issues pertinent to hedge fund investments: short and unequal track records, illiquidity, estimation error and the absence of meaningful priors on return distributions. These frameworks represent a significant improvement over Markowitz Mean-Variance Optimization and address theoretical and practical concerns to a large extent.
Nonetheless, such procedures are highly data dependent and frequently do not provide adequate guidance on the estimation of future loss distributions – a significant limitation in the presence of “peso problems”. To better understand this issue we discuss sources of hedge fund “alpha” that often lead to significant negative returns and develop a simple intuitive framework to estimate future loss distributions. Our analysis shows that expected losses are directly related to the magnitude and propensity of observed gains. Finally, we show the efficacy of this simple framework in predicting drawdowns across a broad range of hedge fund strategies and equity markets.
BIO
Andrew Weisman is a Principal in Patel Weisman, a Stamford Connecticut based asset management and consulting firm. He also serves as Director of Research for WR Capital, a Stamford Connecticut based family office and fund of funds. Prior to establishing Patel Weisman, Mr. Weisman served as Managing Director and Chief Portfolio Manager for the Merrill Lynch Hedge Fund Development and Management Group at Merrill Lynch. Mr. Weisman was a founding member and Director of Research and Risk Management for Strativarius Capital Management LLC, a New York based Global/Macro hedge fund. Until April 30, 2002, Mr. Weisman was the Chief Investment Officer and member of the board of directors for The Nikko Securities Co. International, Inc. (Nikko). Professional achievements include the development of several risk management products: analytical tools and trading methodologies used by Nikko and other money management firms.
Mr. Weisman published an extensive collection of articles on asset allocation and risk issues related to hedge funds. Research awards include: the Fourth Annual Bernstein Fabozzi/Jacobs Levy Award for Outstanding Article published in The Journal of Portfolio Management during the volume year 2001-2002; and the GAIM Research Paper of the Year, 2003. He is currently a member of the editorial advisory board of the Journal of Portfolio Management. Previous professional experience includes his position as head of Bankers Trust's Automated Currency Trading Unit and senior asset manager for Commodities Corporation LLC (Goldman Sachs Princeton LLC). Mr. Weisman has a BA from Columbia College (1982), a Masters in International Affairs specializing in International Business from the Columbia University School of International and Public Affairs (1983), completed all course work and comprehensive exams towards a PhD in Money and Financial Markets at the Columbia University Graduate School of Business.