In memoriam: Professor Kathryn R. Heidt

What is most notable about the life and the career of Professor Kathryn R. Heidt is not that it was tragically cut short by her death on May 24, 2005, but that she was able to achieve so much, both personally and professionally, in the too-brief time allotted to her. After receiving her bachelor’s degree from Penn State and her J.D. from Cleveland State College of Law, Professor Heidt clerked for two years for the Honorable John T. Patton of the Ohio Court of Appeals before becoming an associate with the Philadelphia law firm Duane Morris & Heckscher. Opting for a change in her path in the law, she obtained an LL.M. from Yale Law School and began her distinguished academic career. Before joining the faculty of the University of Pittsburgh as a Professor of Law in 1995, Professor Heidt had served on the law faculty at Wayne State University Law School, and had been a visiting faculty member of the University of Pennsylvania Law School, the University of North Carolina School of Law, New York Law School, and the Law Faculty of the University of Utrecht in the Netherlands.\u

Indexation doesn't make sense

In this brief note we argue that for investors that are serious about matching (the risks of) assets and liabilities, indexation is a doubtful proposition as significant autonomous changes may occur in the industry allocation and accompanying risk-return profile of the portfolio underlying the index. The name of the index may not change, but the underlying portfolio does!

Managed Features and Hedge Funds:

In this paper we study the possible role of managed futures in portfolios of stocks, bonds and hedge funds. We find that allocating to managed futures allow investors to achieve a very substantial degree of overall risk reduction at limited costs. Apart from their lower expected return, managed futures appear to be more effective diversifiers than hedge funds. Adding managed futures to a portfolio of stocks and bonds will reduce that portfolio’s standard deviation more and quicker than hedge funds will, and without the undesirable side-effects on skewness and kurtosis. Overall portfolio standard deviation can be reduced further by combining both hedge funds and managed futures with stocks and bonds. As long as at least 45-50% of the alternatives allocation is allocated to managed futures, this again will not have any negative side-effects on skewness and kurtosis.

Foundations of Portfolio Theory

Prize Lecture to the memory of Alfred Nobel, December 7, 1990.Portfolio Theory;

EDUCATIONAL FINANCE IN MINNESOTA: AN EXAMINATION OF THE FOUNDATION AID PROGRAM

Public Economics,

In Search of the Optimal Fund of Hedge Funds

In this paper we investigate whether it is possible for a fund of hedge funds to not only offer investors access to a diversified basket of hedge funds but to provide skewness protection at the same time. We study two different strategies. The first is for a fund to buy stock index puts and leverage itself, in line with the skewness reduction strategy proposed earlier in Kat (2002). In general, the latter strategy is too dependent on the actual asset allocation strategy followed by investors to allow a fund to be constructed that is optimal for all investors at the same time. However, for investors that invest more or less equal amounts in stocks and bonds and who keep their hedge fund allocation below 30% such a fund can indeed be structured. The second strategy is for a fund to buy put options on itself. We show that this does allow a fund to offer skewness protection to different types of investors at the same time, but compared to the optimal strategy the protection will be somewhat less accurate. Under both strategies the fund of funds is likely to incur a significant loss in expected return. As long as the hedge fund allocation stays below 30%, however, the loss of expected return on investors’ overall portfolios will remain limited.

Interim report on the ground-water resources of Manatee County, Florida

A large part of western Manatee County is devoted to the growing of winter vegetables and citrus fruits. As in most of peninsular Florida, rainfall in the county during the growing season is not sufficient for crop production and large quantites of artesian water are used for irrigation. The large withdrawals of artesian water for irrigation result in a considerable decline of the artesian head in the western part of the county. This seasonal decline of the artesian head has become larger as the withdrawal of artesian water has increased. The lowering of the fresh-water head in some coastal areas in the State has resulted in an infiltration of sea water into the water-bearing formations. The presence of salty water in the artesian aquifer in parts of the coastal area of Manatee County indicates that sea water may also have entered the waterbearing formations in this area as a result of the decline of artesian pressure during the growing season. The purpose of the investigation is to make a detailed study of the geology and ground-water resources of the county, primarily to determine whether salt-water encroachment has occurred or is likely to occur in the coastal area. (PDF contains 38 pages.

An Excursion into the Statistical Properties of Hedge Funds

This paper provides an overview of the most important statistical properties of individual hedge fund returns. We find that the net-of-fees monthly returns of the average individual hedge fund exhibit significant degrees of negative skewness, excess kurtosis, as well as positive first-order serial correlation. The correlations between hedge funds in the same strategy group are of the same order of magnitude as the correlations between funds in different strategy groups and relatively low. Only 10-20% of the variation in the average individual hedge fund’s returns can be explained by what happens in the US equity and bond markets. Compared to individual funds, portfolios of hedge funds tend to exhibit lower skewness, higher serial correlation and higher correlation with stocks and bonds. Movements in the US equity and bond markets still only explain 20-40% of the variation in hedge fund portfolios returns though. Finally, an equally-weighted portfolio of all funds in our sample offers a 2.76% higher mean return than the average fund of funds. This strongly suggests that the timing and fund picking activities of the average fund of funds are not rewarded by a higher return.