Asymmetric Returns: The Future of Active Asset Management by Alexander M. Ineichen

Asymmetric Returns: The Future of Active Asset Management by Alexander M. Ineichen
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Asymmetric Returns: The Future of Active Asset Management

by Alexander M. Ineichen


Adobe E-Book

March 2007

In Asymmetric Returns, financial expert Alexander Ineichen elevates the critical discussion about alpha versus beta and absolute returns versus relative returns. He argues that controlling downside volatility is a key element in asset management if sustainable positive compounding of capital and financial survival are major objectives. Achieving sustainable positive absolute returns are the result of taking and managing risk wisely, that is, an active risk management process where risk is defined in absolute terms and changes in the market place are accounted for. The result of an active risk management process-when successful-is an asymmetric return profile, that is, more and higher returns on the upside and fewer and lower returns on the downside. Ineichen claims that achieving Asymmetric Returns is the future of active asset management. A

lexander M. Ineichen, CFA, CAIA, is Managing Director and Senior Investment Officer for the Alternative Investment Solutions team, a key provider within Alternative and Quantitative Investments, itself a business within UBS Global Asset Management. He is also on the Board of Directors of the Chartered Alternative Investment Analyst Association (CAIAA). Ineichen is the author of the two UBS research publications In Search of Alpha!Investing in Hedge Funds (October 2000) and The Search for Alpha Continues!Do Fund of Hedge Funds Add Value? (September 2001). As of 2006 these two reports were the most often printed research papers in the documented history of UBS. He is also author of the widely popular Absolute Returns!The Risk and Opportunities of Hedge Fund Investing, also published by John Wiley & Sons.


Preface. Acknowledgments.

Chapter 1: Survival of the Richest!Volatility Matters.

The Future of the Asset Management Industry.

Change in Risk Perception.

Living Legends on the Future of Investment Management.

Defining Asymmetric Returns.



Volatility Matters.

The Thing about Compounding Capital.

Evolution Is Jumpy, Not Smooth.

Chapter Summary and Conclusions.

Appendix: On Compounding, Survival, and Dull Swiss.

Chapter 2: Risk and Transparency.

Risk Is "Exposure to Change".

The Boiling Frog Syndrome.

Risk versus Knightian Uncertainty.

Prevention versus Cure.

Risk Measurement versus Risk Management.

The Musical Chairs Effect.

Tracking Risk versus Total Risk.

Controlled versus Uncontrolled Risk.

Investor Protection versus Capital Protection.

Investor Protection.

Systematic versus Nonsystematic Risk. Systematic Risk.

Nonsystematic Risk.

Chapter Summary and Conclusions.

Chapter 3: The Price of Asymmetric Returns.

Fees!An Evergreen Issue Revisited.


Paying for the Balancing Act.

Paying the Milkman Thrice.

To Pay or Not to Pay!That Is the Question.

Asymmetric Returns through Derivatives.


Capital-Guaranteed Structures.

Chapter Summary and Conclusions.

Appendix: Aggregate Fees.

Chapter 4: Fireflies before the Storm.

Risk, Returns, and Market Efficiency.

Active versus Passive Asset Management.

Introducing a Flexible Approach to Managing Money.

Time Diversification, Risk, and Uncertainty.

Does Time Increase or Reduce Risk?

Tyranny of the Status Quo.

Chapter Summary and Conclusions.

Appendix: On Volatility and Fat Tails.

Chapter 5: Alpha Is an Option.

Inefficiency of Financial Markets.

There Is No Free Lunch Plan.

Unorthodox Economics and Voodoo Science.




Behavioral Finance.

Chapter Summary and Conclusions.

Appendix: On Alpha, Beta, and Randomness.

Chapter 6: Active Risk Management.

Applicability and Adaptability of Skill.

Adaptability versus Style Drift.

The Law of Active Management.

Leverage as a Risk Management Tool.

Three Ways to Use Leverage.

The Art of Generating Alpha.

Asymmetric Returns and Active Risk Management.

Convertible Arbitrage.

Equity Market Neutral.

Distressed Securities.

Event-Driven Multi-strategy.

Equity Hedge.

Sector Specialists.


Chapter Summary and Conclusions.

Appendix: The Random Approach to Manager Selection.

Chapter 7: Asymmetry of Single-Manager Risk.

Convertible Arbitrage.

Global Macro.

Chapter Summary and Conclusions.

Chapter 8: Asymmetric Returns as a Business.


The Best Business Model!Ever.

Departing from Randomness.

Positive Compounding as a Major Business Objective.

Honey, I¨ve Shrunk the Margins.

Competition Puts Pressure on Margins.

The Role of Innovation and Marketing.

Performance Attribution and Fees.

Alpha? What Alpha?

Intellectual Property versus Adaptability of Skill.

Difference between Generating Alpha and Talking about It.

Are Benchmarking and Financial Innovation Opposites?

Chapter Summary and Conclusions.

Appendix: Predicting the Future of the S&P 500.

Chapter 9: The Past, the Present, and the Unpredictable.

Is It a Bubble?

Cyclical Versus Structural Change.

Return Expectations Revisited.

What Happened to the Long Term?

Markets Will Continue to Fluctuate.

Probabilistic, Dynamic, and Flexible Approach.

Future Opportunity Set for Active Risk Managers.

Return Update and Outlook.

Closing Remarks.



About the Author.