distributions of asset level risk statistics.
Page xii Third, we have tried to clarify certain discussions. We received feedback on how clearly we had conveyed certain ideas through at least two channels. First, we presented a talk summarizing the book at several investment management conferences.1 "Seven Quantitative Insights into Active Management" presented the key ideas as: 1. Active Management is Forecasting: consensus views lead to the benchmark. 2. The Information Ratio (IR) is the Key to Value-Added. 3. The Fundamental Law of Active Management: 4. Alphas must control for volatility, skill, and expectations: Alpha = Volatility · IC · Score. 5. Why Datamining is Easy, and guidelines to avoid it. 6. Implementation should subtract as little value as possible. 7. Distinguishing skill from luck is difficult. This talk provided many opportunities to gauge understanding and confusion over these basic ideas. We also presented a training course version of the book, called "How to Research Active Strategies." Over 500 investment professionals from New York to London to Hong Kong and Tokyo have participated. This course, which involved not only lectures, but problem sets and extensive discussions, helped to identify some remaining confusions with the material. For example, how does the forecasting methodology in the book, which involves information about returns over time, apply to the standard case of information about many assets at one time? We have devoted Chap. 11, Advanced Forecasting, to that important discussion. Finally, we have fixed some typographical errors, and added more problems and exercises to each chapter. We even added a new type of problem—applications exercises. These use commercially available analytics to demonstrate many of the ideas in the 1The BARRA Newsletter presented a serialized version of this talk during 1997 and 1998.
Page xiii book. These should help make some of the more technical results accessible to less mathematical readers. Beyond these many reader-inspired improvements, we may also bring a different perspective to the second edition of Active Portfolio Management. Both authors now earn their livelihoods as active managers. To readers of the first edition of Active Portfolio Management, we hope this second edition answers your challenges. To new readers, we hope you continue to find the book important, useful, challenging, and comprehensive. RICHARD C. GRINOLD RONALD N. KAHN
Page xv ACKNOWLEDGMENTS Many thanks to Andrew Rudd for his encouragement of this project while the authors were employed at BARRA, and to Blake Grossman for his continued enthusiasm and support of this effort at Barclays Global Investors. Any close reader will realize that we have relied heavily on the path breaking work of Barr Rosenberg. Barr was the pioneer in applying economics, econometrics and operations research to solve practical investment problems. To a lesser, but not less crucial extent, we are indebted to the original and practical work of Bill Sharpe and Fischer Black. Their ideas are the foundation of much of our analysis. Many people helped shape the final form of this book. Internally at BARRA and Barclays Global Investors, we benefited from conversations with and feedback from Andrew Rudd, Blake Grossman, Peter Algert, Stan Beckers, Oliver Buckley, Vinod Chandrashekaran, Naozer Dadachanji, Arjun DiVecha, Mark Engerman, Mark Ferrari, John Freeman, Ken Hui, Ken Kroner, Uzi Levin, Richard Meese, Peter Muller, George Patterson, Scott Scheffler, Dan Stefek, Nicolo Torre, Marco Vangelisti, Barton Waring, and Chris Woods. Some chapters appeared in preliminary form at BARRA seminars and as journal articles, and we benefited from broader feedback from the quantitative investment community. At the more detailed level, several members of the research groups at BARRA and Barclays Global Investors helped generate the examples in the book, especially Chip Castille, Mikhail Dvorkin, Cliff Gong, Josh Rosenberg, Mike Shing, Jennifer Soller, and Ko Ushigusa. BARRA and Barclays Global Investors have also been supportive throughout. Finally, we must thank Leslie Henrichsen, Amber Mayes, Carolyn Norton, and Mary Wang for their administrative help over many years.
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