MONDAY 19th May 2008
8.30 a.m.	Registration
9.00 a.m.	Christopher Polk, London School of Economics
	Best Ideas This paper provides powerful evidence that mutual fund managers can pick stocks that outperform the market. Many have argued that the inability of mutual fund managers to outperform benchmarks is the most powerful evidence in favor of capital market efficiency. Berk and Green (2004) argue that this is not necessarily the case, because factors related to the structure of the money management industry will cause even good stock pickers not to outperform. We circumvent this problem by examining the performance of stocks that represent managers. "Best Ideas." We find that the stock that active managers display the most conviction towards ex-ante, outperforms the market, as well as the other stocks in those managers portfolios, by approximately 36 to 86 basis points per month depending on the benchmark employed. This leads us to two conclusions. First, the U.S. stock market does not appear to be efficiently priced, since even the typical active mutual fund manager is able to identify a stock that outperforms. Second, consistent with the view of Berk and Green, the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers, even though they are able to pick good stocks. We suggest an aspect of the money management business outside of Berk and Green.s analysis that we argue plays an important role: There is pressure on managers to overdiversify due to an irrational preference by investors for funds with low idiosyncratic risk
10.00 a.m.	Bernd Scherer, Morgan Stanley
	Portfolio Theory versus Theory of the Firm This talk will argue that the optimal asset allocation for externally funded pension obligations can not be answered by looking at the pension fund in isolation. This mainstreamview on pension fund allocation assumes that plan sponsors trade off some kind of surplus measure against a however defined surplus risk. A recent example of this asset management centric thinking states … “but the beauty of the surplus optimization approach is not that it provides a particular answer, but that it enables the plan sponsor consciously to set the surplus beta position for the plan, controlling pension plan financial risk in the process. Risk tolerance is ultimately an individual decision”. In the presenters view the impact of asset allocation decisions on debt capacity, taxation or liquidity costs is simply neglected in this approach. It also ignores all we know about modern valuation theory, namely that valuation and preferences are independent. Finally it assumes that plan sponsors exhibit utility. We will argue that a naive translation of portfolio theory into corporate finance is at the root of the problem. Corporate leaders routinely underline the importance to invest into the company core business. Pension fund that hold diversified global investment portfolios are the logical opposite of this statement as it is well understood that capital market investments by definition create zero net present value. This has many implications beyond pension fund management. For example: the "correct" discount rate for pension liabilities can not be set by regulators but will develop endogeneously as a function of plan sponsor default risk, pension plan assets and funding level.
11.30 a. m.	Randy Cohen, Harvard
	Finding Outperforming Managers Most money managers underperform their benchmarks.  Moreover, there is little evidence of persistence in manager performance. This has led many to conclude that: -Managers can’t pick stocks -It’s impossible to pick winning managers In this presentation I argue that these conclusions are incorrect.  Rather:   -Managers can pick stocks but fail to outperform because of institutional factors  -Winning managers can be identified in advance but doing so requires much more than simply looking at past average returns We will then discuss the ways that great managers, especially in alternatives, can be selected.
2.00 p. m.	Dimitri Vayanos, London School of Economics
	Bond Supply and Excess Bond Returns We examine empirically how the maturity structure of government debt affects bond yields and excess returns. Our analysis is based on a theoretical model of preferred habitat in which clienteles with strong preferences for specific maturities trade with arbitrageurs. Consistent with the model, we find that (i) the supply of long- relative to short-term bonds is positively related to the term spread, (ii) supply predicts positively long-term bonds' excess returns even after controlling for the term spread and the Cochrane-Piazzesi factor, (iii) the effects of supply are stronger for longer maturities, and (iv) following periods when arbitrageurs have lost money, both supply and the term spread are stronger predictors of excess returns.
3.00 p. m.	Dan di Bartolomeo, Northfield Information Systems
	Non Linear Stock Selection Models
	Based on Arbitrage Pricing Theory arguments, almost all quantitative stock selection models assume a linear relationship between some property of a stock and the expectation of future returns across a cross-section of stocks at the given moment in time.  Alternatively, a some models assume a linear relationship between a time varying property of a stock and the expectation of future returns for that particular stock.   This presentation will review the literature with respect to non-linear security selection models, and describe some empirical findings on higher order relationships between factors and returns.  In addition, we will describe and demonstrate the use of "entropy minimization", a non-parametric computational method as a tool for stock selection.
4.30 p. m.	Jason MacQueen, Alpha Strategies
	When Harry met Harry  -  from Markowitz to Magic What is the use of risk management?  Every investment firm pays lip service to the idea of managing risk, but all too often this simply takes the form of running monthly risk reports and filing them away, after a cursory glance to check that the tracking error is about right.  In many institutions, the Risk Department is lumped in with the Performance Measurement Department, which tells you that risk is regarded as an ex post activity rather than as an ex ante activity.  Rarely does the portfolio risk structure affect the fund manager's decisions when rebalancing a portfolio. Risk is dull and boring -the real excitement lies in Returns!   This talk proposes that Risk Management can be turned into Return Enhancement.  It uses a couple of real examples to show how sophisticated risk management tools can be used to generate better returns, by using the manager's own skill.  The process does not involve leverage, nor is there any more overall risk than the manager would be taking anyway.  And yet, by a process that can only be described as Magic by its fans, (and 'hocus-pocus' by others) the portfolio returns improve.    A Philosopher's Stone indeed, turning portfolio lead into gold!
	TUESDAY 20th May 2008
9.00 a. m.	Sebastian Ceria, Axioma Multi-Portfolio Optimization
	In a typical Institutional Separately Managed Account (SMA) framework, client portfolios that follow a similar strategy are individually optimized and the resulting trades are pooled together for execution. However, this practical trading consideration is rarely incorporated in the individual optimizations of the accounts that participate in the pooled trading. As a result, the expected trading cost of each account is severely underestimated, resulting in a set of trades that is far from optimal. Multi-portfolio optimization provides a strategic platform for scaling modern portfolio construction techniques from the individual account level, at which they are originally specified, to the level of a pooled, simultaneous rebalancing. It allows many individual client portfolios with individualized portfolio construction strategies to be optimized simultaneously while considering aggregate market-impact costs that better represent realistic trading. Most practitioners resolve the Multi-portfolio optimization problem by resorting to heuristics, which can produce suboptimal solutions, increase account dispersion, and potentially bias certain accounts, thus resulting in unfair trading practices. In this talk, we will propose an approach to solve the Multi-portfolio optimization problem which is based on sound optimization decomposition techniques that can be used to tackle this problem efficiently.
10.00 a. m.	PRACTITIONER PANEL   -   Quant: After the Fall
	Chaired by Keith Quinton with Ed Fishwick and Max Darnell   The month of August 2007 saw difficulties occurring simultaneously for a significant subset of quants.  This naturally led to some very important questions being asked about quantitative approaches within academic circles, amongst practitioners, and in the press.  Are quants all the same?  Is it correct to infer that this event revealed weaknesses in quants’ risk management tools?  As a liquidity event, was this one any different from other liquidity shocks?  Should quants be rethinking their alpha and risk management processes?  The answers to these questions may be less obvious than much of the industry discourse to-date suggests.
11.30 a. m.	Lars Lochstoer, London Business School
	Does Hedging Affect Commodity Prices? The Role of Producer Default Risk    In this paper we develop a model of inventory management and hedging by commodity producers that face increasing cost of external finance in case they have to fund cash shortfalls for availing of their growth options. We hypothesize that the cost of external finance is increasing in producers' default risk. We then test the asset-pricing implications of the model for commodity spot and futures prices. We find that while high default risk is associated with high levels of hedging demand in futures markets and predicts higher excess returns on short-term futures contracts, default risk is not much related to contemporaneous convenience yield (measured as the basis between the shortest maturity futures contract and a longer-term one). The convenience yield is instead better explained by inventories of commodity producers. These results are consistent with our model's implications, especially during periods of low inventory. Our results thus support the Keynesian hypothesis that hedging pressure affects commodity futures prices.
2.00 p. m.	James Bevan, CCLA
	Fear, Greed and Optimism - A New Approach to Charity Management  The management of charitable funds has been through much change – both in theory and practice. But whilst an historic reliance of long term funds on equities is now unfashionable, what has been ushered in is not a cure-all but rather a different set of risks and potential returns.The key focus for many charitable funds has moved to diversification as the only free lunch, and the pursuit of superior risk-adjusted returns, seeking ‘alpha’ and alternative risk premia. This has lead to the use of VaR methodologies, risk budgeting, and perhaps a reliance on grand promises and naïve assumptions rather than economic rents. It may also have led to higher costs.  As to what follows next, it’s no coincidence that the equity cult followed prolonged success with the asset class, and the move into other strategies follows rather than leads, with little real contrarian thinking. The herd instinct remains well-embedded. What is also apparent is that some of the most highly regarded funds have irreproducible informational advantages and these may indeed be ephemeral with survivorship bias.   What looks likely to stand the test of time is a reliance on common sense supported by sound quantitative principles and analyses – just as it should always have been, and this should apply to both asset management and the control of liabilities. Sadly the received wisdom that makes up much of the mainstream of quant analysis and management looks like the ongoing triumph of hope over reality…
3.00 p. m.	Edward Fishwick, Blackrock & Stephen Satchell, Cambridge University
	"Value"   The premise under which Value investing occurs is surprisingly questionable when viewed dispassionately. Our talk examines the usual valuation framework and isolates the components that are reasonable against thise which require heroic acts of faith.