Volume 2, No. 1, First Quarter 2004

Practitioner’s Digest • Vol. 2, No. 1

The “Practitioners Digest” emphasizes the practical significance of manuscripts featured in the “Insights” and “Articles” sections of the journal. Readers who are interested in extracting the practical value of an article, or who are simply looking for a summary, may look to this section.

The Market Maker in the age of the ECN

by: Wayne H. Wagner

Electronic trading venues demonstrate an impressive ability to successfully match trades with high accuracy, low cost, and at remarkable speeds. Are they on track to take over the trading process, or will there always be activities better performed by human beings?

Great Moments in Financial Economics: III. Short-Sales and Stock Prices

by: Mark Rubinstein

This is the third in a series of articles on Great Moments in Financial Economics to appear in the Journal. For each, the purpose is to trace, as well as the author can, the history of the development of an important idea. In this case, the idea, usually associated with the work of Edward Miller, is that in the real-world of investors with (1) heterogeneous beliefs and of markets with (2) significant barriers to short-sales, stocks for which these barriers are binding will have prices at least temporarily too high relative to an alternative economy in which these two features are not both simultaneously present. In the early 21st century this idea has experienced a sort of renaissance of research which has been used to explain a large number of phenomena which can otherwise appear anomalous, from the momentum factor in stock returns, to market crashes, to the recent Internet-based stock market "bubble", and to the growing popularity of certain hedge fund strategies.

Managed Futures and Hedge Funds: A Match Made in Heaven

by: Harry M. Kat

We study the possible role of managed futures in portfolios of stocks, bonds and hedge funds. We find that allocating to managed futures allows investors to achieve a very substantial degree of overall risk reduction at, in terms of expected return, relatively limited costs. Adding managed futures to a portfolio of stocks and bonds will reduce that portfolio's standard deviation more and quicker than hedge funds will, and without the undesirable side-effects on skewness and kurtosis. Apart from their lower expected return, managed futures therefore appear to be more effective diversifiers than hedge funds. Overall portfolio standard deviation can be reduced further by combining both hedge funds and managed futures with stocks and bonds. As long as at least 45-50% of the alternatives allocation is allocated to managed futures, this will have no negative side-effects on skewness and kurtosis.

Institutional Management Fees: Are the Annual Fees You Pay For Money Management Appropriate?

by: Sherry L. Jarrell and Edward S. O'Neal

The authors quantify and analyze the current annual fees in the institutional mutual fund industry. They identify the primary determinants of fund expenses and develop a methodology for gauging whether fees on an institutional investment are consistent with other similar alternative investments. This methodology treats fixed income, domestic equity and international equity funds separately and can be applied to the pricing of potential separate account service providers as well as institutional mutual funds.

Can Simple Buy and Sell Rules Increase Index Future Day Trading Profitability?

by: Susana Yu and Joel Rentzler

Day trading index futures is popular. Two common strategies are trend-following and gap-reversal. This paper uses these strategies as "base strategies" and asks whether simple intraday exit rules can increase their profitability. Intraday stop-loss exit rules appear to add return to a trend-following base strategy of buying index futures at the opening and closing out the position at the close. There is no strong evidence that the same is true of profit-lock exit rules or that either works with a corresponding gap-reversal strategy.

An Invitation to the Readers of JOIM

by: Jack L. Treynor

“Case Studies” presents a case pertinent to contemporary issues and events in investment management. Insightful and provocative questions are posed at the end of each case to challenge the reader. Each case is an invitation to the critical thinking and pragmatic problem solving that are so fundamental to the practice of investment management.

Technical Analysis

by: Sanjiv R. Das and David Tien

“Surveys& Crossovers” This section provides surveys of the literature in investment management or short papers exemplifying advances in finance that arise from the confluence with other fields. This section acknowledges current trends in technology, and the cross-disciplinary nature of the investment management business, while directing the reader to interesting and important recent work.

Beyond the Random Walk

by: Vijay Singal • reviewed by: Mark Kritzman

Investment Management Portfolio Diversification, Risk, and Timing - Fact and Fiction

by: Robert L. Hagin • reviewed by: Oliver Campbell

“Book Reviews” identifies important, and often popular, new books from a wide range of investment topics. Beyond providing a summary and review of the content and style of the books, “Book Reviews” seeks to contribute to a conscious, critical, and informed approach to investment literature.

Pension Fund Management Revisited

by: Tony Kao

“Surveys& Crossovers” This section provides surveys of the literature in investment management or short papers exemplifying advances in finance that arise from the confluence with other fields. This section acknowledges current trends in technology, and the cross-disciplinary nature of the investment management business, while directing the reader to interesting and important recent work.