Chapter 17. Asset Allocation Barbells


Assistant Professor, San Diego State University


Managing Partner and CEO, Flint Rock Capital Management

Abstract: The investment management industry is dominated by three kinds of service providers. Indexers offer to reproduce the performance of a benchmark. This service appeals to the most risk-averse investor, or the investor who believes that financial markets are perfectly efficient. A second category of service providers, hedge funds, is marketed to aggressive investors, and many (though not all) are very volatile. This category is often considered inappropriate by fiduciaries responsible for institutional funds, though making small allocations to "alternative investments" is becoming more accepted. The third category, core products, offers a product with modest tracking risk in exchange for modest out performance of a benchmark. The distinction between hedge funds and core products is less substantial than is commonly supposed. Most core managers could easily compete in offering hedge funds. A typical hedge fund manager could easily convert his fund into a core product offering. Clients with funds to be managed really need only two kinds of investment management service providers. The first is indexers, who offer benchmark replication services and compete for business based on low fees and low costs. If the industry evolution contemplated in this chapter were to happen, the second would ...

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