Chapter 1

Rethinking Real Money

I. Why Real Money?

Real money is a commonly used term in the financial markets to denote a fully funded, long-only traditional asset manager. Real money managers are often referred to as institutional investors. The term real money means the money is managed on an unlevered basis. This contrasts with hedge funds, which often manage money using borrowed funds or leverage. Real money funds can and often do employ leverage, but they normally attain leverage on a nonrecourse basis (e.g., investing as a limited partner in a fund that is levered). Examples of real money managers are public and private pension funds, university endowments, insurance company portfolios, foundations, family offices, sovereign wealth funds, and mutual funds.

This book focuses on the mistakes made and lessons learned in 2008 and attempts to incite a dialogue about how to construct better portfolios in the real money world. For this reason, mutual funds will be excluded from the discussion, since they are usually managed under strict mandates and asset class restrictions, rather than as broad portfolios where asset allocation decisions dominate the investment process.

Real money funds are important and worth analyzing because: (1) they are some of the largest pools of capital in the world; (2) they have a direct impact on the functioning of society; (3) they lost staggering amounts of money in 2008; and (4) in many cases, these funds are ultimately backstopped by the taxpayer ...

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