Guest lecture Rudy Vermeersch
INVESTMENT PHILOSOPHY & INVESTMENT PROCESS
An investment philosophy comprises, among other things, an investor’s beliefs
concerning how markets operate, where inefficiencies arise and how they can be
exploited. It is about signal generation.
The investment process refers to the organisational structure and defines best
practice on how to implement an existing investment philosophy most effectively.
Portfolio construction and risk budgeting are, therefore, integral parts of an
investment process but not of an investment philosophy. The investment process
concerns how a given set of signals is put to use.
Investor’s beliefs about markets (~informational efficiency)
Completely efficient (Efficient Market Hypothesis)
The idea that the market price of an asset becomes the unbiased estimate of its ‘fair’
value.
Passive investing
Inefficient market
investor irrationality and behavioral biases
active investing; beating market should be easy, but also a lot of competition. Not easy
in practice
Efficiently inefficient
markets are inefficient but to an efficient extent, competition among professional
investors makes markets almost efficient, but the market remains so inefficient that they
are compensated for their costs and risks.
active investment by those with a comparative advantage
is the sum of micro-efficiency = macro-efficiency?
ALPHA & BETA
ASSET CLASS
can be differentiated on the basis of three criteria:
1. The conceptual criteria refers to the driving forces, i.e. the factors that influence the
risk/return characteristic of the asset class.
2. The statistical factors relate to the risk/return characteristics of the security/
financial instrument.
3. The practical aspects refer to the fact that the asset class can be invested in, and if
need be, the risk/return characteristics replicated by the investment manager.
Assets within an asset class share the same risk and return characteristics and
react to similar factors. The return on assets within an asset class should therefore
have a high correlation.
Examples: Equities, Bonds, Cash, Real Estate, Hedge Funds, Commodities, Private Equity,
…
, Big picture:
WHAT ARE BETA AND ALPHA RISKS?
Beta returns are coming from asset class returns
Characteristics of Beta return:
Limited in number
Economic fundamentals driven
Relatively low sharpe ratio
Reliable over the long run
Alpha returns are coming from value added by active managers
Characteristics of Alpha return:
Abundant in number
Manager skills driven
Zero-to-negative-sum game
Not necessarily reliable
THE ASSET ALLOCATION PROCESS
INVESTMENT PHILOSOPHY & INVESTMENT PROCESS
An investment philosophy comprises, among other things, an investor’s beliefs
concerning how markets operate, where inefficiencies arise and how they can be
exploited. It is about signal generation.
The investment process refers to the organisational structure and defines best
practice on how to implement an existing investment philosophy most effectively.
Portfolio construction and risk budgeting are, therefore, integral parts of an
investment process but not of an investment philosophy. The investment process
concerns how a given set of signals is put to use.
Investor’s beliefs about markets (~informational efficiency)
Completely efficient (Efficient Market Hypothesis)
The idea that the market price of an asset becomes the unbiased estimate of its ‘fair’
value.
Passive investing
Inefficient market
investor irrationality and behavioral biases
active investing; beating market should be easy, but also a lot of competition. Not easy
in practice
Efficiently inefficient
markets are inefficient but to an efficient extent, competition among professional
investors makes markets almost efficient, but the market remains so inefficient that they
are compensated for their costs and risks.
active investment by those with a comparative advantage
is the sum of micro-efficiency = macro-efficiency?
ALPHA & BETA
ASSET CLASS
can be differentiated on the basis of three criteria:
1. The conceptual criteria refers to the driving forces, i.e. the factors that influence the
risk/return characteristic of the asset class.
2. The statistical factors relate to the risk/return characteristics of the security/
financial instrument.
3. The practical aspects refer to the fact that the asset class can be invested in, and if
need be, the risk/return characteristics replicated by the investment manager.
Assets within an asset class share the same risk and return characteristics and
react to similar factors. The return on assets within an asset class should therefore
have a high correlation.
Examples: Equities, Bonds, Cash, Real Estate, Hedge Funds, Commodities, Private Equity,
…
, Big picture:
WHAT ARE BETA AND ALPHA RISKS?
Beta returns are coming from asset class returns
Characteristics of Beta return:
Limited in number
Economic fundamentals driven
Relatively low sharpe ratio
Reliable over the long run
Alpha returns are coming from value added by active managers
Characteristics of Alpha return:
Abundant in number
Manager skills driven
Zero-to-negative-sum game
Not necessarily reliable
THE ASSET ALLOCATION PROCESS
