Book Bits For Saturday: 12.17.2011

Frontiers of Modern Asset Allocation
Edited by Paul D. Kaplan
Summary via publisher, Wiley
Building on more than 15 years of asset-allocation research, Paul D. Kaplan, who led the development of the methodologies behind the Morningstar Rating and the Morningstar Style Box, tackles key challenges investor professionals face when putting asset-allocation theory into practice. This book addresses common issues such as:
• How should asset classes be defined?
• Should equities be divided into asset classes based on investment style, geography, or other factors?
• Should asset classes be represented by market-cap-weighted indexes or should other principles, such as fundamental weights, be used?
• How do actively managed funds fit into asset-class mixes?
Kaplan also interviews industry luminaries who have greatly influenced the evolution of asset allocation, including Harry Markowitz, Roger Ibbotson, and the late Benoit Mandelbrot. Throughout the book, Kaplan explains allocation theory, creates new strategies, and corrects common misconceptions, offering original insights and analysis. He includes three appendices that put theory into action with technical details for new asset-allocation frameworks, including the next generation of portfolio construction tools, which Kaplan dubs “Markowitz 2.0.”

Risk Less and Prosper: A Guide to Safer Investing
By Zvi Bodie and Rachelle Taqqu
Review via All Things Financial Planning Blog
Co-authors Zvi Bodie, Ph.D. Professor of Finance at Boston University (author of Worry Free Investing) and Rachelle Taqqu, CFA and Principal of New Vista Capital, reveal a smart and safer way to plan for your lifetime goals. Like Christopher Columbus discovering that the world is not flat, the authors debunk timeworn investment beliefs and practices that expose investors to more risk than ever imagined — and more risk than investors can afford to take.
Getting it Wrong: How Faulty Monetary Statistics Undermine the Fed, the Financial System, and the Economy
By William A. Barnett
Summary via publisher, MIT Press
Blame for the recent financial crisis and subsequent recession has commonly been assigned to everyone from Wall Street firms to individual homeowners. It has been widely argued that the crisis and recession were caused by “greed” and the failure of mainstream economics. In Getting It Wrong, leading economist William Barnett argues instead that there was too little use of the relevant economics, especially from the literature on economic measurement. Barnett contends that as financial instruments became more complex, the simple-sum monetary aggregation formulas used by central banks, including the U.S. Federal Reserve, became obsolete. Instead, a major increase in public availability of best-practice data was needed. Households, firms, and governments, lacking the requisite information, incorrectly assessed systemic risk and significantly increased their leverage and risk-taking activities. Better financial data, Barnett argues, could have signaled the misperceptions and prevented the erroneous systemic-risk assessments.
Measurement and the Economic Emergence of the Modern World
By Douglas Allen
Summary via publisher, University of Chicago Press
In The Institutional Revolution, Douglas W. Allen offers a thought-provoking account of another, quieter revolution that took place at the end of the eighteenth century and allowed for the full exploitation of the many new technological innovations. Fundamental to this shift were dramatic changes in institutions, or the rules that govern society, which reflected significant improvements in the ability to measure performance—whether of government officials, laborers, or naval officers—thereby reducing the role of nature and the hazards of variance in daily affairs.
The Hedge Fund Mirage: The Illusion of Big Money and Why It’s Too Good to Be True
By Simon Lack
Excerpt via publisher, Wiley
If all the money that’s ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good… Hedge fund investors in aggregate have not done nearly as well as popularly believed. The media focus on the profi ts of the top managers has obscured the absence of wealthy clients. Although the industryperformed well in the 1990s, it was small and there weren’t many investors. In recent years as its rapid growth has continued, results have suffered and many more investors have lived through mediocre returns compared with those enterprising few that found hedge funds when the industry itself was undiscovered.