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Steven Abrahams. Competitive Advantage in Investing
Table of Contents
List of Tables
List of Illustrations
Guide
Pages
Competitive Advantage in Investing. Building Winning Professional Portfolios
Preface
Acknowledgments
1 Welcome, Harry Markowitz. In the Beginning
Choose Wisely
All Cash Flow Includes Risk
Risk Is the Mirror to Return
The Surprising Power of Diversification
The Sources of Risk and Correlation
Markowitz's Open Questions
Notes
2 A Sharpe Line. Finding a Place on the Efficient Frontier
Traveling Along the Capital Market Line
Putting a Price on Assets Along the Capital Market Line
The Power of Leverage, the Price of Equity, the Value of a Good Manager
A Theory that Changed Investing
Note
3 The Counsel of Critics. Putting Theory to the Test
A Problem with Alpha
Performance Turns on More Than Beta
Seeds of New Approaches
4 Toward a New Capital Asset Pricing Model. A New Focus on Leverage
Limits to Leverage
More Betting-Against-Beta
A Natural Experiment
Limits on More Than Leverage
Note
5 The Local Capital Asset Pricing Model. Shopping in the Neighborhood
Local Markets for Investing
Implications of Local Markets
Local Pricing
An Inefficient Aggregate Market Portfolio
Weighted Pricing of Overlapping Assets
Incentives to Diversify
A Flatter Capital Market Line than Global CAPM
Appendix
6 Creating Competitive Advantage. Constrained Optimization
Scale, Cost, and Compensation
Leverage
Funding Terms
Hedging
Quality and Cost of Capital
Information
Access to Assets
Tax and Accounting Rules
Political and Regulatory Environment
Notes
7 Building a Portfolio on Competitive Advantage. Navigating Future States of the World
Return and Risk Goals
Anticipating Future States of the World
Choosing Among Feasible Investments
Putting the Pieces Together
From Theory to Application
Note
8 Investing for Total Return: Mutual Funds
The Structure of Mutual Fund Investing
Constraints on Mutual Funds
Role of Performance Benchmarks
Role of the Investment Covenant
Mutual Fund as Intermediary
Sources of Comparative Advantage
Scale, Cost, and Compensation
Leverage, Funding Terms, and Hedging
The Quality and Cost of Capital
Information and Access to Assets
Tax and Accounting, Politics, and Regulation
Predictions of Local CAPM
Pursuit of Scale
Narrower and Broader Benchmarks
Investing Outside of Benchmarks
Relative Value Investing
The Quality and Cost of Capital
Other Findings
Conclusion
Notes
9 Investing for Total Return: Hedge Funds
The Structure of Hedge Fund Investing
A Relative Lack of Constraint on Hedge Fund Investing
Role of Performance Benchmarks and Investment Covenants
Peculiarities of Reported Hedge Fund Returns
Publicly Traded Hedge Funds
Sources of Comparative Advantage
Scale, Cost, and Compensation
Leverage, Funding Terms, and Hedging
Quality and Cost of Capital
Information and Access to Assets
Tax and Accounting, Politics, and Regulation
Predictions of Local CAPM
The Formal Literature
The Impact of Incentive Compensation
Out-of-Index Sources of Excess Return
Use of Illiquid Assets, Leverage, Hedging, and Short Positions
Improving the Quality and Lowering the Cost of Capital
Focusing on Markets Where Information Is Expensive
Conclusion
10 Investing for Banks, Thrifts, and Credit Unions
The Structure of Bank Investing
Basics of Disintermediation
Duration of Equity
Duration of Leverage
Duration of Net Interest Income
Other Forms of Equity
The Unique Role of a Bank Investment Portfolio
Sources of Comparative Advantage
Cost and Compensation
Leverage
Funding Terms
Deposit Funding
Wholesale Funding
Bank Funding Differences
Hedging
Quality and Cost of Capital
Information
Access to Assets
Tax and Accounting Rules
Political and Regulatory Environment
Predictions of Local CAPM
Evidence for Local CAPM
Differentiation
Retail Rather Than Wholesale Funds
Loans Rather Than Securities
Low- and High-Quality Assets
Short- Rather than Long-Maturity Assets
Floating- Rather than Fixed-Rate Debt
Conclusion
Appendix: A Few Special Topics in Bank Balance Management—The Duration of Regulatory Leverage
Balancing Risk-Weighted and Economic Bank Capital
Notes
11 Investing for Property/Casualty and Life Insurers
The Structure of Insurance Investing
The Basics of Insurance
Sources of Comparative Advantage
Scale, Cost, and Compensation
Leverage
Funding Terms
Hedging
Quality and Cost of Capital
Information
Access to Assets
Tax and Accounting
Tax Treatment
Accounting Treatment
Political and Regulatory
Predictions of Local CAPM
Evidence of Local CAPM
Life Insurer Preference for Long Maturities; P&C Preference for Short Maturities
Life Insurer Preference for Illiquid Assets; P&C Preference for Liquid
P&C Holdings of Municipal Bonds
Preference for Fixed Income
Conclusion
Note
12 Investing for Broker/Dealers
Broker Market Structure
Revenues for Brokers
The Volcker Rule
The Role of Broker as Financial Intermediary
Sources of Comparative Advantage
Scale, Cost, and Compensation
Leverage
Funding Terms
Hedging
Quality and Cost of Capital
Information
Access to Assets and Tax and Accounting
Political and Regulatory Environment
Predictions of Local CAPM
Informal Findings
Market Share
Portfolio Size and Asset Preference
Preference for Liquid Assets
Conclusion
Notes
13 Investing for Real Estate Investment Trusts
REIT Market Structure
Sources of Comparative Advantage
Scale, Cost, and Compensation
Leverage
Funding Terms
Hedging
Quality and Cost of Capital
Information and Access to Assets
Tax and Accounting Rules
Political and Regulatory Environment
Predictions of Local CAPM
Informal Evidence
Conclusion
Note
14 Investing for Sovereign Wealth Funds
The Structure of Sovereign Wealth Funds
Stability Funds
Savings Funds
Currency Reserve Funds
Pension Funds
Development Funds
The Challenges of Governance and Public Support
The Issue of Government or Individual Control
Sources of Comparative Advantage
Scale, Cost, and Compensation
Leverage
Funding Terms
Hedging
Quality and Cost of Capital
Information and Access to Assets
Tax and Accounting
Political and Regulatory Environment
Predictions of Local CAPM
Informal Evidence. Liquid Investments for Reserve Portfolios
Diversifying Assets for Stability and Savings Funds
Illiquid Assets for Stability and Savings Funds
Conclusion
15 Investing for Individuals
The Structure of Individual Investing
Sources of Comparative Advantage
Scale, Cost, and Compensation
Leverage
Funding Terms
Hedging
Quality and Cost of Capital
Information and Access to Assets
Tax and Accounting Rules
Political and Regulatory Environment
Predictions of Local CAPM
Informal Results
Individuals Underperform Institutions
Individuals will Cede Asset Management
Conclusion
Note
16 Turning the Tables: Investor Impact on Asset Values
The Yield Curve Conundrum
European Demand for Highly Rated Assets
The Effects of Quantitative Easing
Bank Liquidity Rules Shift Investment Portfolio Holdings
Other Cases
The Competitive Portfolio Response
References
About the Author
Index
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