Harry Markowitz
Portfolio Theory: Past, Present & Future

This presentation will discuss:

* What was financial theory and practice like before 1952?

* What did portfolio theory add?

* How is portfolio theory used in practice today?

* What may we expect from portfolio theory in the future?

Les Balzer
Hedge & Absolute Funds - Past, Present and Future

* Global trends - hedge funds growing at 20% pa

* Sources of funds in US move from wealthy individuals to institutions

* Why are smart investors forecast to increase their allocations by 35% pa

* Do investors look for high returns? No! Why? What do they want?

* Australian demand for funds increased 65% in 12 months

* Seven habits of highly effective funds

Ross Barry
Applying and Adapting Modern Portfolio Theory to Hedge Funds: A Historical Review

This presentation will examine some of the pioneering research by academics and industry professionals on hedge funds. While most fund managers advocate hedge fund investing, academic research has cast some doubt over whether hedge funds are truly market neutral and whether they add value. Key points of focus will be on (i) understanding and measuring the biases inherent in hedge fund data; (ii) seminal papers that test for the existence of a hedge fund "skill premium"; and (iii) studies of the impact of hedge funds on a broader portfolio's mean-variance efficiency.

John Bowers
The Market-Clearing Price of Investment Management Services

Suppose an active investment manager really can add value above a suitable benchmark. What is a reasonable price to charge for this service? And should the intellectual capital involved be acting as agent or as principal?

These questions are examined in a 'capture ratio' framework, where capture ratio is defined as dollar fee divided by dollar alpha. Equilibrium is defined as where the intellectual capital that generates the outperformance is indifferent between operating as an agent (as an investment management firm) or operating as a principal (by borrowing money and proprietary trading). This equilibrium is examined in a mean-variance framework. The main result is that, for reasonable parameter values, the equilibrium capture ratio is somewhat less than the author (a practitioner) had expected ex ante! This is a question of considerable interest to investment practitioners.

David Chessell
The Two Portfolio Approach to Investing: Back to the Future

There is general agreement in the industry that returns are predominantly driven by asset allocation decisions. There is also general agreement about the use of mean variance analysis as the primary tool for designing optimal portfolios. Moreover, there is probably an equal degree of modesty in the profession about our ability to predict asset class returns and their characteristics in the future. Yet there is a wide dispersion of views as to what represents the optimal strategic asset allocation. Traditionally, the most important decision is considered to be the relative weighting to bonds versus equities.

The two portfolio approach is based on the view that the most important decision is the relative weighting between the market portfolio (listed assets) and the target return portfolio (alternative assets). I will argue that the two portfolio approach is a more faithful reflection of modern portfolio theory pioneered by Harry Markowitz and that the future will involve going back to the spirit of his original thesis for constructing optimal portfolios."

Neil Esho
Market Discipline in Superannuation

Market discipline has long been viewed as an important ally of banking supervisors, and is now being formalised through the Basel II reforms to banking supervision. The ability of market participants to correctly price claims, assess risk and withdraw funds from financial institutions, and to influence financial decision-making is seen as an important complement to the work of supervisors. In this discussion, we explore whether the concept of market discipline can be applied to superannuation. In particular, the paper addresses the following questions: Is there a role for market discipline in superannuation? Under what conditions can market discipline work in superannuation? Do those conditions exist in the Australian market? We conclude that there is a role for more effective market discipline in superannuation, that the introduction of fund choice will accelerate this process, but that there is still room to significantly enhance the effectiveness of market oversight of superannuation funds and trustees.

Mark Gimple
FINANCIAL ENGINEERING: Too much Finance; Too little Engineering?

In the past anything that had to do with technology in a financial institution was usually handed over to the IT department. As time passed institutions became wiser and established not only technology departments but whole divisions that provided technology to the firm. But this technology was still considered related to information flow and control. The question to pose is would people be confident in flying in a Boeing 747 if the same persons who programmed the system that cut the payroll checks for Boeing employees were the same that programmed the flight control systems. Of course not! It would be insane to think so. But in the financial world the concept of having persons with domain expertise on the business/product side building product seems very foreign. Have some institutions embraced the idea. The answer is a weak yes. They have in limited capacity in limited operations. The concept of having a team of experts on the business side building products (financial engineers) is new and the adoption of such a view will take time. But it is a logical inevitability????

Jack Gray
Investment Futures: Speculation on Trends & Discontinuities

This talk will speculate on possible futures for investment management and the investment management industry. Topics to be speculated upon include:

* Relationships between fiduciaries, internal teams, advisers, and managers

* Managing information

* Organisational structures

* Investment processes and opportunities

* Theoretical models

* Pricing

Alan Scowcroft
Understanding Forecasts – A Unified Framework for Combining and Auditing Analyst and Strategy Forecasts

This presentation will discuss a framework for efficiently combining stock level and portfolio forecasts to create conditional estimates of alpha for use in optimisation. A forecast is based on additional information; be it information directly relating to the likely future performance of a class of securities, or information about market processes. We therefore place our analysis within an information theoretic framework. This has the implication that the information within a forecast is expressed relative to the consensus forecast, and not relative to any long-term market equilibrium. However, there are strong connections between this framework, the Bayesian framework of Black and Litterman (1992) and the more classical one of Grinold and Kahn (2000). In fact we argue that our more general framework can be understood loosely as a fusion of these two approaches. We draw out the connections and discuss the estimation of our model and present simulation results.

Michael Adams
Legal Developments in the Financial Management Industry

This session will deal with:

* key developments in financial services law

* statutory developments post the implementation of FSRA and the new superannuation APRA licensing regime

* developments in regulatory agency theory

* examination of recent case law that directly impacts on financial management industry

Douglas McTaggart
Markowitz, MPT and Diversification

What did Markowitz teach us about diversification? Have portfolios become more or less diversified since the advent of computers and MPT? This talk considers the history of diversification, current practices, and where they might go in the future.

Frank Ashe
Investing with Profound Ignorance

Many times when we come to construct portfolios in a quantitative fashion we have used, and still use, models that are appropriate if we know the parameters of the return distribution. It is manifest that we do not know the values of such basic parameters as the equity risk premium or the likely future real return of bond market investments. So if we shift our attention to deal with investment decisions in alternative classes or hedge funds then our ignorance is at least an order of magnitude greater.

I will give a brief overview of the attempts to overcome this ignorance, what more is needed, and ask how we should structure our investment processes to mitigate the problems raised.

Ron Bird
Fusion Investing

Fusion Investing relates to how aspects of different investment styles can be combined in order to exploit the opportunities that currently proliferate in the developed equity markets. I will decribe these opportunities, why they occcur and then use European results to demonstrate the application of fusion investing.

Eckhard Platen
Investments for the Short and Long Run

This presentation discusses the optimal selection of investments for the short and long run in a continuous time financial market setting. First it documents under very general conditions the almost sure, pathwise long run outperformance of all portfolios by the growth optimal portfolio. Secondly it assumes that every investor prefers more to less and keeps the freedom to adjust her or his risk aversion at any time. The resulting optimal portfolios in a continuous market are characterised by a two fund separation result and are located at the Markowitz efficient frontier. This frontier is shown to move continuously over time. The risk aversion of investors controls the volatility of their optimal portfolios. It is argued that it is not rational to reduce in an optimal portfolio the risk aversion further than is necessary to achieve the maximum growth rate. Finally, the growth optimal portfolio is shown to approximate the market portfolio and to follow a very particu lar, well-known time transformed diffusion process.

Stephen Satchell
The Past, Present and Future in Optimisation for Institutional Investors

This presentation will address issues such as robust optimisation and simulated optimal portfolios versus the conventional mean-variance optimisation approach.

Albert Shiryaev
Some New "Stochastic Calculus" Look on the Technical Analysis of the Stock Prices

Financial market is a very complicated and intricate creature with many different groups of market's operators including: (a) fundamentalists, (b) quantitative analysts ("quants"), and (c) technicians. It is known that the mathematical methods, especially stochastic calculus, are very well-developed and efficient in the theoretical investigations and practical activity of the fundamentalists and quants. But from this point of view for technical analysis the basic methods have mainly only descriptive character. At the same time it becomes more and more clear that the methods of stochastic calculus should play an essential role in the technical analysis and its applications to the trading at the financial markets.

In the talk we present some our investigations in the technical analysis based on the tools of the stochastic calculus. We concentrate our attention on the problems related to the prediction and estimation of the time of change of the probability characteristics or the change of the tendency of movement of stock prices. We shall demonstrate that many "descriptive" methods of the technical analysis admitt the clear mathematization. Especially we make a stochastic analysis of the famous Japanese charts Renko and Kagi used in Japan already in XIX century. The Kagi chart is also known as a "price range". It gives a method for forecasting the price trends from the price changes that exceed either a certain range H or a certain rate H. We relate with this H a new notion of the H-volatility that plays a crucial role for our stochastic analysis of the movement of the stock prices.

Russ Wermers
Investing in Mutual Funds When Returns are Predictable

This paper breaks new ground in asset management by developing a quantitative approach to using business-cycle information to select actively managed funds. It demonstrates that using such information to predict the performance of mutual funds results in a large increase in performance, relative to standard approaches that predict performance without using business-cycle information.

Abstract

This paper analyzes the performance of portfolio strategies that invest in noload, open-end U.S. domestic equity mutual funds, incorporating predictability in (i) manager skills, (ii) fund risk-loadings, and (iii) benchmark returns. Predictability in manager skills is found to be the dominant source of investment profitability – long-only strategies that incorporate such predictability considerably outperform prior-documented “hot-hands” and “smart-money” strategies, and generate positive and significant performance with respect to the Fama-French and momentum benchmarks. Specifically, these strategies outperform their benchmarks by 2-4% per year through their ability to time industries over the business cycle. Moreover, they choose individual funds that outperform their industry benchmarks to achieve an additional 3-6% per year. Overall, our findings indicate that industries are important in locating outperforming mutual funds, and that active management adds much more value than documented by prior studies.

Xun Yu Zhou
A Few Good Stocks -- The Tale of Benchmark Tracking

In this presentation I will report our research on the problem of tracking a financial benchmark --- a continuously compounded growth rate or a stock market index --- by dynamically managing a portfolio consisting of a small number of traded stocks in the market. We employ the stochastic LQ control and semidefinite programming techniques to generate the optimal tracking portfolios. We present numerical examples involving stocks traded at Hong Kong and New York Stock Exchanges, to illustrate the various features of the model and its performance.