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Active Alpha: A Portfolio Approach to Selecting and Managing Alternative Investments
John Wiley and Sons Ltd, Aug 2007, Pages: 384
There is a developing trend among institutional investors to consider alternative investments (hedge funds, private equity, real estate, and hard assets) as a group of assets driven by a series of measurable return and risk factors. Heretofore, many investors have added these investments purely on the initial merits of diversification and return, without a sophisticated approach to integrating them into a risk budgeting and portfolio construction process. However, there is a much richer way to conduct this implementation using factor and cash flow analysis, to identify common investment and structural factors and more accurately understand the correlations among these investments. This understanding will lead to far more accurate portfolio construction with fewer redundancies and greater efficiency. Benefits from this include more precise answers to how much of each alternative asset class should exist in a traditional portfolio, in what combinations, and how rebalancing should be conducted based on forward-looking favor views combined with current factor exposures for each alternative investment. Answers to these provide a roadmap with quantitative and qualitative underpinnings for the migration of traditional investors to the nirvana that they see but have yet to organizationally attain, which is exemplified by sophisticated endowments such as Harvard University and Yale University.
About the author
Alan Dorsey is a Managing Director and Alternative Investment Strategist at Lehman Brothers. He is Co-Head of Portfolio Advisory for the Private Investment Management group that serves Lehmans high net worth clients and Head of Portfolio Strategy for multi asset class institutional portfolios with a focus on alternative investments. Prior to joining Lehman Brothers, he was Managing Director and Director of Non-Traditional Investments and Research at RogersCasey, a leading consultant to pension funds and other institutional investors. In this role, Alan had responsibility for managing research and investment teams pertaining to hedge funds, private equity, real estate and hard asset investing. Previously, Alan was Managing Director, Director of Research, at Bryant Park Capital, Inc. Alan began his career as a securities analyst. Alan holds a B.A. in Economics from Wesleyan University and is a Chartered Financial Analyst. Since 1997, he has served as a member of the investment committee for Wesleyan University, where he is a past trustee.
Praise for Active Alpha
'Active alpha is the quest for every sophisticated investor. This book covers all of the key alpha sources currently mined by active managers, reduces the complexity of the subject, and helps the investor get started in the right direction.'
-Mark Anson, Chief Executive Officer, Hermes Pensions Management Ltd.
'Long-held traditional methods for investing large portfolios are giving way to new processes that are designed to improve productivity and diversification. These changes find their locus in the sometimes overly mysterious world of absolute return strategies. In this book, Alan Dorsey demystifies that new world and provides a guiding pathway into the future of professional portfolio management. This is an important read for any investor who plans to succeed going forward.'
-Britt Harris, Chief Investment Officer, Teacher Retirement System of Texas
'With great lucidity, Alan Dorsey's book, Active Alpha, fills an important void by identifying the relevant institutional features of this complex subject and by providing a unifying analytic framework for understanding and constructing portfolios of alternative assets. For anyone investing in the alternative class, from the new student to the experienced practitioner, Active Alpha is a necessary read. I am recommending it to everyone I know with such an interest, and it is destined to become a much thumbed reference on my shelf.'
-Steve Ross, Franco Modigliani Professor of Financial Economics, Sloan School, MIT
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