Volume 11, No. 3, Third Quarter 2013

Practitioner’s Digest • Vol. 11, No. 3

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.

Value of Corporate Control: Some International Evidence

by: Paul Hanouna, Atulya Sarin and Alan C. Shapiro

Existing literature shows that the market values control because controlling shareholder can generate private benefits and improve the efficiency of the corporation. In this study, we provide a measure of the value of control for a set of domestic and foreign transactions. Our measure of the value of control is the difference between the offer premium for minority and comparable majority transactions. We find that the median control premiums in the United States are around 30%. The control premium in market-oriented countries is higher than that for the bank-oriented countries. Also, we find that the premiums are lower in cross-border transactions relative to domestic transactions.

LIBOR Versus OIS: The Derivatives Discounting Dilemma

by: John Hull and Alan White

Traditionally practitioners have used LIBOR and LIBOR-swap rates as proxies for risk-free rates when valuing derivatives. This practice has been called into question by the credit crisis that started in 2007. Many banks now consider that overnight indexed swap (OIS) rates should be used as the risk-free rate when collateralized portfolios are valued and that LIBOR should be used for this purpose when portfolios are not collateralized. This paper examines this practice and concludes that OIS rates should be used in all situations.

Generating Superior Performance in Private Equity: A New Investment Methodology

by: S.P. Kothari, Gitanjali Swamy and Konstantin Danilov

This paper provides a new investment methodology for private equity portfolios that applies principles of investment management used in traditional asset classes. We apply Modern Portfolio Theory (MPT) with rational selection of portfolios that are on the efficient frontier of risk-reward optimality, to back-test the performance of private equity (PE) investment portfolios against a corresponding sub-portfolio that is closer to the efficient frontier. The methodology is a guide for investors to build PE portfolios designed to generate superior performance; our experiments show that it is possible to get a performance improvement as large as 20% in some public pension fund portfolios.

Demystifying Managed Futures

by: Brian Hurst, Yao Hua Ooi and Lasse Heje Pedersen

We show that the returns of Managed Futures funds and CTAs can be explained by time series momentum strategies and we discuss the economic intuition behind these strategies. Time series momentum strategies produce large correlations and high R-squares with Managed Futures indices and individual manager returns, including the largest and most successful managers. While the largest Managed Futures managers have realized significant alphas to traditional long-only benchmarks, controlling for time series momentum strategies drives their alphas to zero. We consider a number of implementation issues relevant to time series momentum strategies, including risk management, risk allocation across asset classes and trend horizons, portfolio rebalancing frequency, transaction costs, and fees.

Where the Boys Are-Gender, Risk Taking and Authority in Institutional Equity Management

by: Margaret Stumpp

This paper examines the gender distribution of key investment professionals with decision making and oversight authority in institutional equity management. We find that women are heavily underrepresented among almost all key positions not just within portfolio management. We find no evidence that this is attributable to differences in skill, or the consequence of any relationship between gender and either asset gathering capability or departure rates. However, we do find some evidence of self-selection away from a risky career as women tend to be more highly represented in lower-risk strategies; appear somewhat more benchmark-oriented; exhibit lower tracking error, and exhibit less idiosyncratic risk than their male counterparts. This observation has important ramifications for both career counseling and diversity outreach programs.

The Intended and Collateral Effects of Short Sale Bans as a Regulatory Tool

by: Terrence Hendershott, Ethan Namvar and Blake Phillips

Short-sale bans have been utilized globally as a regulatory tool during periods of financial crisis. This paper reviews the observed intended and unintended effects of short-sale bans. Research has documented pervasive effects spanning many financial markets that include options, convertible bonds, credit default swaps, and exchange traded funds. Such implications should be of interest to regulators and policymakers when contemplating future bans.

The Work Force and Inflation

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.

Successful Investing is a Process: Structuring Efficient Portfolios for Our Performance

by: Jacques Lussier • reviewed by: Bruce Grantier

“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.