Positive Alpha Generation: Designing Sound Investment Processes

‘This timely book offers a comprehensive framework of best practice models and processes that will help active investment managers sharpen their focus on the four key dimensions of understanding investor needs; delivering the promised performance; maintaining absolute transparency and trustworthiness; and ensuring cost efficiency. Reading Dr. Diderich’s systematic treatment of the subject against the backdrop of the credit crisis, one gets the strong inkling that if more investment managers the world over had relied on the kind of rigorous and disciplined techniques presented by the author, many egregious investment mistakes, and many fateful instances of confusion between luck and skill, would have been avoided.’

J.F. Rischard, international consultant, author and former Vice-President for the World Bank

‘An invaluable tool and a reference book for any serious investment professional, Positive Alpha Generation provides the reader with a sound grasp of both traditional and cutting edge portfolio construction techniques. The author balances theoretical concepts and practical applications to pave the way to a successful positive alpha quest.’

Yannick Daniel, CFA, Head of Société Générale Index, SGCIB, Paris

‘Dr Diderich has written an important book on the practice of generating skill-based investment returns. With admirable clarity, he combines financial models and techniques with managerial insights. The result is an impressive treatise on how investment processes can be structured successfully. This book should prove to be of considerable value to practitioners in the investment and hedge fund industries alike.’

Christian C. P. Wolff, Director, Luxembourg School of Finance, University of Luxembourg

‘The turmoil of the current financial crises highlights how difficult and delicate it is to establish and follow sound investment processes. Based on a solid and fine analysis, the study presented by Dr. Diderich offers a precious contribution for a better understanding of expected performances and actual risks and provides a deep insight into the shaping of best possible practices for a conscious and intelligent monitoring of investment portfolios.’

André Prüm, Dean of the Faculty of Law, Economics and Finance, University of Luxembourg

Successful investing is about generating ideas on the future of financial markets. But it is also about implementing these ideas in portfolios, managing risk, and satisfying investor needs. Dr. Diderich presents tools and techniques to develop investment processes to allow the successful transfer of investment ideas into real performance, that is, positive alpha. The book explains the underlying theoretical concepts and describes how they can be applied in practice. A key focus is put on illustrative real world examples.

Dr. Diderich uses the value chain concept as guiding principle to explain the different value-adding stages of an investment process. The book covers process as well as organization aspects related to generating positive alpha. It focuses on different quantitative and qualitative techniques for forecasting markets and taking investment decisions. The author devotes three chapters to risk management. Portfolio construction algorithms, ranging from the classical Markowitz model to advanced risk budgeting as well as factor model-based approaches, are reviewed and their usage illustrated. A special focus is put on practical implementation aspects, like handing transaction costs and using derivative instruments. As an investment product is only as good as the needs it satisfies, Dr. Diderich presents and compares different investment processes for different types of products ranging from benchmark-oriented portfolios, absolute positive return solutions, capital protection approaches, hedge funds, to liability-driven investing methods. Quality control is related to performance measurement models.

This book shows how an investment manager can provide investment solutions that maximize his or her opportunities along the four dimensions, delivering promised performance, being flexible as well as cost efficient, offering transparency, and providing innovation in order to best satisfy the investor’s needs. At the end of the book the reader will be capable of designing or enhancing an investment process for a single or a family of investment products and portfolios from start to finish. The book will be of interest to portfolio managers, investment product designers, quantitative analysts and anyone involved in investment design processes.