PE/vcap is analogous to buying up and out calls. Sure, at various locales (on duration) the return will look asymmetric, but the hit-rate *should* reduce the return to nominal rates over a non-trivial return period. Returning 5x at a 20% (AON outcome) hit-rate will result in no return at all. So, wouldn’t you agree that it’s foremost a hunt for alpha over a bet on diversification?

>98% of buy-side assets are directed to delta-one product.

Buying vega sounds great in this environment, but how do you hedge your theta/synthetic vol? Certainly I see it as a corollary to vcap, but it remains a bet on convexity over hit-rate.

Great blog.

BCS (Griffin’s dad)
Destriero Partners

In all seriousness, a core investment asset allocation makes sense, which is what most adivsors are trying to find with MPT. The problem with MPT is that it is so backward looking that it becomes little more than an art project with little real use. A qualified advisor (does about 20% sound right) who is forward looking can use MPT as background information, but to invest in assets that we know are at a disadvantage because the pie chart says to makes no common sense.

Interestingly, even advisors who sense that MPT is a trap, and are looknig for alternatives are having a hard time since they lack basic education on investments and economics. Many are piling into alternatives such as managed futures. If I had to bet, and I guess I do, I’d bet that several of the funds taking big assets right now get hammered sometime soon.