Market timing

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Do curso por Indian School of Business

Creating a Portfolio

64 classificações

Indian School of Business

Creating a Portfolio

64 classificações

Curso 4 de 5 em Specialization Trading Strategies in Emerging Markets

This course integrates all the learning from the first three courses and guides the learner about ways of building a portfolio of strategies and integrating the same into a hedge fund. In the first part of the course, you will be taught ways of measuring the contribution of a strategy to a portfolio in terms of risk and return. You will be able to appreciate the consequences of including a strategy to a new as well an existing portfolio. Next, you are taught various ways of conducting the tilting analysis in order to determine the optimal weight to be placed on each strategy. After this you will learn to develop techniques for minimizing overall portfolio risk. You will also get a basic overview of the regulatory framework that is applicable to hedge funds. You will know about different types of investors and the expectations of each type of investors.

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Module 1

In this module you will learn about the efficient market hypothesis and various market anomalies. In the second half, you will learn how to evaluate the performance of investments.

Performance measurement 19:04

Performance measurement 28:30

Market timing3:25

Performance measurement 36:14

Conheça os instrutores

Ramabhadran Thirumalai
Assistant Professor
Indian School of Business
Prasanna Tantri
Senior Associate Director
Center for Analytical Finance

Learning outcomes.

After watching this video,

you will be able to;

one, understand market timing.

Well, the next thing I want to talk about here is market timing.

So remember that there are two components to a fund manager's performance.

In fact, if you go and ask

an actively managed fund manager and ask him how do you make money,

most likely he'll come up with one or two - method one or method two or both.

Method one is I'm smarter,

so I'm going to pick securities better than the next guy.

In other words, I will select stocks

better than the next guy and that's how I make my money.

That's called security selection.

On the other hand,

there is an aspect of making money which is called market timing.

In other words, suppose they say I am very good at timing the market.

What does that mean? It means that I know that

stock markets are going to underperform next year;

I'm able to prognosticate.

So what I will do is before the beginning of the year,

I'm going to move from stocks to bonds.

And if I know that stock market is going to perform better,

I'm going to move into stocks at that time.

So this ability to move in and out of

the market at the right time is not surprisingly called timing.

But if you look at this figure,

what you will see is suppose you draw a graph of

a managed portfolio or a fund-managed fund manager return on the y axis,

the vertical axis and the return on the market or some benchmark on the x axis.

You will notice that this manager has absolutely zero alpha - that's the two lines

meeting at the origin - and you will see that when the market is expected to be high,

he moves into a high beta portfolio,

which makes a lot of sense because a high beta portfolio stands to

gain much more when the market itself is doing well.

And when the market is forced to do not so well,

that is a low state,

he moves into a low beta portfolio,

thereby limiting his exposure to the market.

However, what I will observe is points

A and B. I don't observe the two lines as an analyst.

And when I observe the two lines - sorry,

the two points A and B and connect the line through them,

I get the dashed line.

And the dashed line concludes two wrong things; number one,

it tells me that because it has a negative intercept,

the fund manager has a negative alpha.

Wrong conclusion number one.

Number two, since the slope of the dashed line is larger than either of the solid lines,

you would also falsely accuse this person of having greater,

at least systematic, risk compared to what he had in either state.

Bottom line, if you look at measures like alpha,

they do not measure timing ability sensibly.

We need better ways to try and measure

whether managers can time markets in any sensible way.

And that's where we're going to go next.

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