Abstracts and Biographies: SQA Half Day Conference 2016 Petter Kolm 60 Years of portfolio optimization: Practical challenges and current trends The concepts of portfolio optimization and diversification have been instrumental in the development and understanding of financial markets and financial decision making. In light of the 60 year anniversary of Harry Markowitz s paper Portfolio Selection, we review some of the approaches developed to address the challenges encountered when using portfolio optimization in practice, including the inclusion of transaction costs, portfolio management constraints, and the sensitivity to the estimates of expected returns and covariances. In addition, we selectively highlight some of the new trends and developments in the area such as diversification methods, risk-parity portfolios, the mixing of different sources of alpha, and practical multi-period portfolio optimization. Petter joined the Courant Institute of Mathematical Sciences as a Clinical Associate Professor of Mathematics and as the Deputy Director of the Mathematics in Finance M.S. Program in 2007. Since May 2010, he is the director for this program. Previously, he worked in the Quantitative Strategies Group at Goldman Sachs Asset Management. He holds a Ph.D. in Mathematics from Yale University, an M.Phil. in applied mathematics from the Royal Institute of Technology in Stockholm, and an M.S. in Mathematics from ETH Zürich. Petter coauthored the books Financial Modeling of the Equity Market: From CAPM to Cointegration (Wiley, 2006), Trends in Quantitative Finance (CFA Research Institute, 2006), Robust Portfolio Management and Optimization (Wiley, 2007), and Quantitative Equity Investing: Techniques and Strategies (Wiley, 2010). Financial Modeling of the Equity Markets was among the Top 10 Technical Books selected by Financial Engineering News in 2006. As a consultant and expert witness, he has provided his services in areas such as algorithmic and quantitative trading strategies, econometrics, forecasting models, portfolio construction methodologies incorporating transaction costs, and risk management procedures.
Petter is a member of the editorial boards of the International Journal of Bonds and Currency Derivatives (IJBCD), International Journal of Portfolio Analysis and Management (IJPAM), Journal of Investment Strategies (JOIS), and Journal of Portfolio Management (JPM). He serves on the board of the International Association of Financial Engineers (IAFE). Colm O Cinneide On some themes from Black and Litterman (1991): combining views and equilibrium, sensitivity in optimizations, and portfolio construction as a business process I begin with an overview of the Black-Litterman method for combining views and equilibrium, this being the best-known contribution of the paper, before discussing some related methodologies and extensions. Another important theme of the paper is sensitivity in optimizations. On this, I will provide some insight into why the method is especially effective in reducing the sensitivity of optimal portfolios to expected returns. I will also discuss the issue of sensitivity to optimization inputs other than expected returns, such as constraints, and give an approach to analyzing and understanding that sensitivity. Time permitting, this part will include a discussion of risk contributions. The final theme is that because the approach is mathematically simple and intuitive, and because its outputs are generally easily related to its inputs, the Black-Litterman method is especially effective as the basis of a business process. For practitioners, this may be the most important feature of the Black-Litterman method. Colm O Cinneide spent 20 years in academia prior to entering the finance world, and held tenured positions in Mathematical Sciences and Operations Research. He has been involved in portfolio construction at QS Investors and its predecessor organizations since 2000. He is an adjunct professor in the Columbia Math of Finance program and a board member of the SQA.
Robert Litterman Collaborating with Fischer Black on the development of Black-Litterman Bob Litterman is the Chairman of the Risk Committee and a founding partner of Kepos Capital. Prior to joining Kepos Capital in 2010, Bob enjoyed a 23-year career at Goldman, Sachs & Co., where he served in research, risk management, investments and thought leadership roles. He oversaw the Quantitative Investment Strategies Group in the Asset Management division. While at Goldman, Bob also spent six years as one of three external advisors to Singapore's Government Investment Corporation (GIC). Bob was named a partner of Goldman Sachs in 1994 and became head of the firm-wide risk function; prior to that role, he was co-head of the Fixed Income Research and Model Development Group with Fischer Black. During his tenure at Goldman, Bob researched and published a number of groundbreaking papers in asset allocation and risk management. He is the co developer of the Black-Litterman Global Asset Allocation Model, a key tool in investment management, and has co-authored books including The Practice of Risk Management and Modern Investment Management: An Equilibrium Approach (Wiley & Co.). Bob earned a Ph.D. in Economics from the University of Minnesota and a B.S. in Human Biology from Stanford University. He was inducted into Risk magazine's Risk Management Hall of Fame and named the 2013 Risk Manager of the Year by the Global Association of Risk Professionals. In 2012, he was the inaugural recipient of the S. Donald Sussman Fellowship at MIT's Sloan School of Management. In 2008, he received the Nicholas Molodovsky Award from the CFA Institute Board as well as the International Association of Financial Engineers/SunGard Financial Engineer of the Year Award. Bob serves on a number of boards, including Commonfund, where he was elected Chair in 2014, Options Clearing Corporation, Resources for the Future, Robert Wood Johnson Foundation, the Sloan Foundation and World Wildlife Fund.
Marcos López de Prado Building Diversified Portfolios that Outperform Out-of-Sample Mean-Variance portfolios are optimal in-sample, however they tend to perform poorly out-ofsample (even worse than the 1/N naïve portfolio!) We introduce a new portfolio construction method that substantially improves the Out-Of-Sample performance of diversified portfolios. Marcos López de Prado is Senior Managing Director at Guggenheim Partners, where he manages several multibillion-dollar internal funds. He is also a Research Fellow at Lawrence Berkeley National Laboratory's Computational Research Division (U.S. Department of Energy s Office of Science), where he conducts unclassified research in the mathematics of large-scale financial problems and supercomputing. In addition to his 18 years of trading and investment management experience at some of the largest corporations, he has received several academic appointments, including Postdoctoral Research Fellow of RCC at Harvard University and Visiting Scientist at Cornell University's Operations Research Department. Marcos earned a Ph.D. in Financial Economics (2003), a second Ph.D. in Mathematical Finance (2011) from Complutense University, is a recipient of the National Award for Academic Excellence by the Government of Spain (National Valedictorian, 1998) among other awards, and was admitted into American Mensa with a perfect test score. Marcos serves on the editorial board of 5 academic journals, including the Journal of Portfolio Management (IIJ), and is the managing editor of Quantum4Quants.org, the first online community dedicated to financial quantum computing. He has collaborated with over 30 leading academics, resulting in some of the most read papers in Finance (SSRN), multiple international patent applications on Algorithmic Trading, three textbooks, numerous publications in the top Mathematical Finance journals, etc. Marcos has an Erdös #2 and an Einstein #4 according to the American Mathematical Society. Jason MacQueen RULES-BASED STYLE ROTATION: Dynamic Switching between Smart Portfolios
Smart Beta has become the latest fashion to conquer the investment community. From a quant perspective, these are simply factor portfolios that offer significant exposure to the desired Style factor (subject, of course, to the usual long-only restriction). However, the weighting schemes of most Smart Beta ETFs make no attempt to trade off expected return against risk, or to minimize their exposure to unwanted factors, with the result that whatever style tilts they do have are likely to have only a modest effect on their performance. It should be, and is, easy to create far more efficient Smart Beta ETFs by using standard portfolio construction principles. These are called Smart Portfolios. The underlying rationale for such products is that Style factors exhibit reasonably persistent risk premia. For example, Value, Quality and Momentum Smart Portfolios all offer the prospect of higher risk-adjusted returns than the market, on average over time, although both will also suffer periodic underperformance. In this talk we consider a dynamic strategy of switching between a set of Smart Portfolio ETFs, each capturing the returns to an individual Style. We focus on identifying the Smart Portfolio with the most consistent performance over the in sample period, which we take to be a measure of the persistence of the corresponding Style factor risk premium. While this may not be the one with the highest returns, it is more likely to perform reasonably well in the next, out-of-sample period. We illustrate this dynamic strategy over the past 12 years in the US market. In 1980 Jason MacQueen founded QUANTEC, which was the first firm to develop risk models for equity markets outside the USA, and which ultimately built risk models for over 50 equity markets. In the early 1990s QUANTEC developed the first global risk model and a global stock selection model, both incorporating global common factors. After QUANTEC was sold, Jason founded R-Squared Risk Management in 2003 to develop customized hybrid risk models. This firm was acquired by Northfield Information Services in 2015, where he is now Director of Research. Jason has developed the theoretical framework of Markowitz and his successors into a practical set of tools for institutional fund managers. By his passionate pleas for a disciplined and logically coherent approach to portfolio management, he has acquired an international reputation as speaker, consultant and iconoclast. He was educated at Oxford and London Universities, where he read Mathematics and Theoretical Physics.
He has been an Honorary Lecturer at Lancaster University Management School, and Visiting Professor at Tokyo University s Center for Advanced Research in Finance. He was the founder and first Chairman of the London Quant Group, a not-for-profit organization established in 2007 to arrange Seminars on the practical application of quantitative investment technology, and is also a Director of the Society of Quantitative Analysts in New York. Attilio Meucci Dynamic Portfolio Management with Views at Multiple Horizons We introduce Dynamic Entropy Pooling, a quantitative technique to perform dynamic portfolio construction with discretionary, non-synchronous views. With Dynamic Entropy Pooling, the portfolio manager can embed in the allocation process signals with life spans ranging from minutes to years, calendar views, autocorrelation stress testing, and the traditional views on expectations, correlations and volatilities. After introducing the theoretical framework for Dynamic Entropy Pooling, we show how to solve the respective portfolio construction problem by means of dynamic programming with time-dependent coefficients. To understand the optimal exposures ensuing from Dynamic Entropy Pooling we analyze a variety of relevant sub-cases and we present two case-studies. Attilio Meucci is a pioneer in advanced risk and portfolio management. His innovations include Entropy Pooling (technique for fully flexible portfolio construction), Factors on Demand (onthe-fly factor model for optimal hedging), Effective Number of Bets (entropy-eigenvalue statistic for diversification management), Fully Flexible Probabilities (technique for on-the-fly stress-test and estimation without re-pricing), Copula-Marginal Algorithm (algorithm to generate panic copulas), and Liquidity Conditional Convolution (technique to generate liquidity- and fundingrisk adjusted portfolio distribution). Attilio is the founder of SYMMYS, under whose umbrella he designed and teaches the six-day ARPM Bootcamp, and manages the charity One More Reason. Attilio Meucci is the firm-wide chief risk officer at KKR. Prior to joining KKR, Attilio was the chief risk officer and director of portfolio construction at Kepos Capital. He was also the global head of research for Bloomberg s risk and portfolio analytics platform; a researcher at Lehman POINT; a trader at the hedge fund Relative Value International; and a consultant at Bain & Co. Concurrently, he taught at Columbia-IEOR, NYU-Courant, Baruch College-CUNY, and Bocconi University. Attilio is the author of Risk and Asset Allocation - Springer and numerous other publications in practitioner and academic journals. He holds a BA summa cum laude in
Physics from the University of Milan, a MA in Economics from Bocconi University, a PhD in Mathematics from the University of Milan and is a CFA chartholder. Attilio is fluent in six languages.