This book was written in 2009, largely inspired as a response to widespread losses the prior year suffered by all types of investors, but especially real money portfolios (pensions, university endowments, sovereign wealth funds, foundations, family offices, and other asset managers). Risk management had been grossly neglected in the run-up to the crisis by almost everyone, and 2008 sent most investors scrambling to stem losses.
Fast-forward to 2013 and the U.S. economy appears to be the healthiest in the world, the S&P is at all-time highs, and quantitative easing seems to have helped avert most worst-case scenarios. Conventional wisdom is that everything is happening in due course: the world was overlevered, a crash ensued, we’re making our way through the adjustment process, and everything will ultimately be fine. Very few investors have used 2008 to do necessary introspection on their investment processes and risk management procedures. In the course of my research for this book, I asked the chief investment officer (CIO) of a triple-digit billion-dollar pension fund what he would have done differently in 2007 with perfect hindsight, and he didn't have an answer. Four years later, I suspect he still doesn't have an answer.
Most real money investors today are patting themselves on the back because they've “recovered” and are at or near their asset highs. Yet this comes after six years spent in a drawdown. Meanwhile, liabilities continue to grow. An 8 percent assumed ...