1、Fake alpha or Heads I win Tails you loseGroup 12張連登 申飛 劉羽飛 劉洋鐘姝宇 王曉宇 姚柳合 楊光Part 1ContentsBrief introduction to some key conceptsPart 2Incentives and a case in pointPart 3Tail risk manufacture and the clawbacks approachPart 4Flaws and possible reasons for the crisisBrief introduction to some key conc

2、epts- The so-called alpha- Fake alpha1- Tail riskThe so-called alphaComes from the specific performance of the company despite its beta mostly due to the special ability owned by the manager contributing to the investment process.The factors shareholder cares more about if they are considering inves

3、ting a specific firmThe so-called alphaThe so-called alphaRj= a + b*RmThe slope of the regression corresponds to the beta of the stock, and measures the riskiness of the stock.Rewrite the CAPM modelRj=Rf + b*(RmRf) =Rf*(1b) + b*Rm.Compare the formula to the regression functionRj=Rf(1b) + b*RmRj=a +

4、b*RmThe source of the alpha is rare Source 2ActivismSource 1AlphaSpecial abilities in identifying undervalued financial assetsSource 3Financial entrepreneurship or engineeringFake alpha vs. AlphaThe real alpha creates excess returns without carrying an additional riskThe reason why fake alpha resemb

5、les alpha is that managers always choose investment creating excess returns compensating for the tail risk.Tail riskTail risk is the risk of an asset or portfolio of assets moving more than 3 standard deviations from its current price. Tail riskFat tails may exist under certain circumstanceTail risk

6、Incentives and a case in point- Agency theory- The novel front of incentives2- Fake alpha and premium- The traditional front of incentives:Lack of monitoring- UBS & CDOs- Disasters like UBSsAgency theoryRelationship between principals and agentsInefficiencies and plete informationDifferent interests

7、LCFIs (large, complex financial institutions)Bargaining powerGetting themselves rewardedLucrative cash bonuses for short-run performance Liquidity riskMaturity mismatchThe novel front of incentives: “Compensation Organization”Fake alpha and premiumPay for alpha, not betaAlpha is hard to generateFake

8、 alpha and hidden tail riskNot claw rewards backThe traditional front of incentives:Lack of monitoring1933 Glass-Steagall monitor speculation1999 repealedLittle or no pricing of government guaranteesCapital requirementsLimited monitoring from debt holdersUBS & CDOs2005 Purchased subprime mortgages20

9、06 The AAA securities yielded a premium;Treated as riskless;Hold onto them2006 June Housing market turned south2007 $50 billion VS Subprime Investment LossesFannie MaeFreddie MacLehman BrothersMerrill LynchWashington MutualWachoviaA.I.GCitigroupBear StearnsDisasters like UBSsTail risk manufacture an

10、d the clawbacks approach- Manufacture of tail risk- A brief introduction of ABS3- CDOsa kind of ABS- Expected return according to the rating- Expected return if considered the bubble- Clawbacks approachManufacture of tail riskA brief introduction of ABS: Four basic elementsThe originatorOwner of the

11、 assetsSPVSpecial Purpose VehiclesAssets Can generate cash flowsInvestorsBuy securities issued by SPVCDOsa kind of ABSCDOs value is highly correlated with the value of the assetsthe house.Bubbles in house market hidden tail risk which can be manufacturedOnly information disclosed about CDOs is the A

12、AA ratingExpected return according to the ratingNormal distributedLow riskLower expected return correspond The risk-return modelExpected return if considered the bubbleFat tailMore likely to lose, thus higher riskCalls for higher return correspondBonus should have been part of the compensation for t

13、he additional riskClawbacks approachThe recipient return all or part of the bonus if certain subsequent negative events occur, such as poor financial performance.Clawbacks approachyear1234RETURN333-Rm1111BONUS222All claw backClawbacks approach1234Fast aThird-partyAccumulated bonusLong-term contractf

14、ocus on long-term returnClawbacks approach2100 surveyed, nearly 300 had clawback provisions.UnitedHealth Group: Recoup over $450M in compensation Clawbacks approach29Not so useful:Recipients may not be stimulated muchNot so accurate:If you can determine accurately , you can also know well about the risksAn approach of deterrence: To remember to concentrate on long-term returnOpinionsFlaws and possible reasons for the crisis- The flaws- Possible factors distributing to the crisis4The flawsFlaws1.Risks are unavoidable a