How to Kill a Black Swan Remy Briand and David Owyong ...
How to Kill a Black Swan Remy Briand and David Owyong ...
How to Kill a Black Swan Remy Briand and David Owyong ...
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Edi<strong>to</strong>r’s Note<br />
Got Risk?<br />
Jim Wi<strong>and</strong>t<br />
Edi<strong>to</strong>r<br />
The basic theme of this issue is one we’ve all become acutely aware of over the last<br />
year: risk. Risk of default, risk of a depression, risk of st<strong>and</strong>ing on the sidewalk<br />
in front of your (former) front yard, shirtless. Over the past year, things we never<br />
dreamed could be real risks suddenly became frighteningly real.<br />
The index business has gotten in on the act, reflecting as always, the soaring hopes <strong>and</strong><br />
then the terrifying fears of inves<strong>to</strong>rs—all in brutally clear numbers, available for easy reference.<br />
When the pendulum shifts <strong>to</strong>ward fear, products that track <strong>and</strong> help manage risk<br />
become popular with inves<strong>to</strong>rs, <strong>and</strong> the index industry has been working hard <strong>to</strong> deliver.<br />
One question that’s been on everyone’s minds recently is, “When it feels like the ‘six<br />
sigma’ or ‘black swan’ event has become a near-daily occurrence, what can we do about it?”<br />
An outst<strong>and</strong>ing submission from <strong>Remy</strong> <strong>Bri<strong>and</strong></strong> <strong>and</strong> <strong>David</strong> <strong>Owyong</strong> of MSCI tells you.<br />
The article “<strong>How</strong> To <strong>Kill</strong> A <strong>Black</strong> <strong>Swan</strong>” not only explains how <strong>to</strong> systematically manage<br />
tail risk, but proposes an entirely new methodology for thinking about asset allocation<br />
in a risk-managed context.<br />
<strong>David</strong> Krein of Dow Jones takes a different tack. Krein wonders why, if asset allocation<br />
explains 90–100 percent of portfolio risk <strong>and</strong> return, people spend so little time creating good<br />
asset allocation benchmarks. He proposes a set of first principles for building better ones.<br />
Next up is an interview with Susan Mangiero, president of Pension Governance, Inc.,<br />
<strong>and</strong> one of the leading pension plan risk management experts in the world, examining the<br />
latest thinking on risk mitigation at the institutional level. Gary Gastineau joins in with<br />
a practical examination on how inves<strong>to</strong>rs can minimize the risk of getting scalped when<br />
trading ETFs, while Sabrina Callin <strong>and</strong> Steve Jones of Pimco examine how portable alpha<br />
strategies must adapt <strong>to</strong> the new era of risk.<br />
Rounding out the issue is John Bogle, who issues a broadside against the American financial<br />
system <strong>and</strong> examines the urgent need <strong>to</strong> embrace fiduciary principles, <strong>and</strong> <strong>David</strong> Blitzer,<br />
who argues that many of the biggest risks in the market lie with inves<strong>to</strong>rs themselves.<br />
And don’t forget Dave Nadig, who takes a humorous back page look at how that<br />
iconic barometer of market sentiment, the Dow Jones Industrial Average, really picks<br />
its constituents.<br />
Risk may not be something we want <strong>to</strong> focus on during these halcyon days of summer,<br />
when we’d rather be thinking about BBQ, apple pie <strong>and</strong> the Fourth of July. But if last<br />
year taught us anything, it’s that risk—<strong>and</strong> how <strong>to</strong> manage it—should always be kicking<br />
around somewhere in the back of our minds.<br />
Enjoy the summer,<br />
Jim Wi<strong>and</strong>t<br />
Edi<strong>to</strong>r<br />
8<br />
July/August 2009