Postmodern Investment Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With offices in North America, Europe, AustraliaandAsia,Wileyisgloballycommittedtodevelopingandmarketing print and electronic products and services for our customers’ professional andpersonalknowledgeandunderstanding. TheWileyFinanceseriescontainsbookswrittenspecificallyforfinance and investment professionals as well as sophisticated individual investors and their financial advisors. Book topics range from portfolio manage- menttoe-commerce,riskmanagement,financialengineering,valuationand financialinstrumentanalysis,aswellasmuchmore. Foralistofavailabletitles,visitourWebsiteatwww.WileyFinance.com. Postmodern Investment Facts and Fallacies of Growing Wealth in a Multi-Asset World GARRY B. CROWDER THOMAS SCHNEEWEIS HOSSEIN KAZEMI John Wiley & Sons, Inc. CoverDesign:Leiva-Sposato CoverPhotograph:(cid:2)c Entienou/iStockphoto Copyright(cid:2)c 2013byGarryB.Crowder,ThomasSchneeweis,andHosseinKazemi. Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedin anyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,or otherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyright Act,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthrough paymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222 RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,orontheWeb atwww.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothe PermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030, (201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions. 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Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Some materialincludedwithstandardprintversionsofthisbookmaynotbeincludedine-booksor inprint-on-demand.IfthisbookreferstomediasuchasaCDorDVDthatisnotincludedin theversionyoupurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com. FormoreinformationaboutWileyproducts,visitwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Crowder,GarryB.,1954— Postmoderninvestment:factsandfallaciesofgrowingwealthinamulti-assetworld/ GarryB.Crowder,ThomasSchneeweis,HosseinKazemi. p.cm. Includesbibliographicalreferencesandindex. ISBN978-1-118-43223-5(cloth);ISBN978-1-118-48383-1(ebk); ISBN978-1-118-48384-8(cloth);ISBN978-1-118-48385-5(ebk) 1.Investments.2.Portfoliomanagement.I.Schneeweis,Thomas.II.Kazemi,Hossein, 1954-III.Title. HG4521.C8692013 332.6—dc23 2012030608 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 To Jill —Garry B. Crowder To Alison —Thomas Schneeweis To Mahnaz and Maziar —Hossein Kazemi Contents Preface xiii TheCoreConceptsinManagingWealth xiv PostmodernInvestment xvi HowtheChaptersAreStructured xviii AsYouBegin xix Acknowledgments xxi CHAPTER1 InvestmentIdeas:EvolutionorRevolution? 1 IntheBeginning 4 TheBeginningofInformationTransparency 11 NewMarkets,NewProducts,andtheEvolution ofModernInvestment 17 NewOpportunitiesCreateNewRisks 18 TheMarketIsNotEfficientforEveryone 19 APersonalViewofModernInvestment 21 WhatEveryInvestorShouldKnow 23 MythsandMisconceptionsofModernInvestment 24 CHAPTER2 EquityandFixedIncome:TheTraditionalPair 31 ABriefReview 35 EquityandFixed-IncomeStylesandBenchmarks 36 BasicSourcesofRiskandReturn 36 Performance:FactandFiction 38 ReturnandRiskCharacteristics 39 TheMythofAverage:EquityandFixed-IncomeReturn inExtremeMarkets 43 AnnualPerformance 46 Performancein2008 46 SpecialIssues:MakingSenseOutofTraditionalStock andBondIndices 46 vii viii CONTENTS APersonalViewofEquityandFixed-IncomeAnalysis 52 WhatEveryInvestorShouldKnow 55 MythsandMisconceptionsofEquityandFixedIncome 56 CHAPTER3 HedgeFunds:AnAbsoluteReturnAnswer? 63 WhatAreHedgeFunds? 68 InvestinginHedgeFunds 69 HedgeFundStylesandBenchmarks 69 BasicSourcesofReturnandRisk 71 Performance:FactandFiction 73 ReturnandRiskCharacteristics 74 TheMythofAverage:HedgeFundIndexReturninExtreme Markets 78 HedgeFundAnnualPerformance 80 Performancein2008 85 MakingSenseOutofHedgeFundIndices 85 MakingSenseOutofAlternativeApproachestoInvesting inHedgeFunds 87 APersonalView:IssuesinHedgeFundInvestment 91 WhatEveryInvestorShouldKnow 95 MythsandMisconceptionsofHedgeFunds 96 CHAPTER4 ManagedFutures:AZero-SumGame? 101 WhatAreManagedFutures? 104 InvestinginManagedFutures 105 ManagedFuturesStylesandBenchmarks 106 BasicSourcesofReturnandRisk 107 Performance:FactandFiction 108 ReturnandRiskCharacteristics 109 TheMythofAverage:CommodityTradingAdvisorIndex ReturninExtremeMarkets 113 CommodityTradingAdvisorAnnualPerformance 115 Performancein2008 120 MakingSenseofCommodityTradingAdvisorPerformance 120 MakingSenseOutofAlternativeApproachestoInvesting inCommodityTradingAdvisors 124 CommodityTradingAdvisorInvestableIndices 125 APersonalView:IssuesinManagedFuturesInvestment 126