Sunday, December 14, 2008
Eugene Fama's Revenge
"The stock-market downturn could force the Pennsylvania state employees' pension fund to make cash payments of $2.5 billion or more to trading partners on Wall Street. ... The blowup is yet another example of the wide-ranging damage caused by sophisticated investment strategies peddled to pension funds and other institutional investors when the stock market was soaring. ... The idea behind portable alpha is that it's easy to match the market. If you do it using derivatives like futures, you can tie up less cash and get the same return you would get using an index fund. Then you can use the rest of your cash to beat the market. ... But this year, the portable alpha portion of their portfolio, worth about $6.4 billion at the start of the year, is trailing the market by an estimated 15 percentage points, indicating that with U.S. and world markets down by 41%, they have lost more than 55% of their value. ... Portable alpha was pioneered in the mid-to-late 1980s at [PIMCO], led by the famed William Gross, and by corporate pension-fund manager Marvin Damsma at Amoco Oil Co., according to the book, 'Capital Ideas Evolving,' by Peter Bernstein", Randall Smith at the WSJ, 1 December 2008.
Did anyone ever hear of the "efficient frontier"? I long ago lost respect for Bill Gross. This is another nail in his intellectual coffin. I am amazed anyone fell for this. Shades of 1980s portfolio insurance.