SmartETF

Asset Allocation and ETFs: Pimco's El-Arian in 2008

Performance of this magnitude is a result of using mean variance and ill-fated risk metrics like VaR and Standard Deviation. I spoke at last years Schwab conference and warned of the dangers of using these older asset allocation methodologies and warned of the risk in the markets at that time (last Fall). Managing ETF's using newer theories like Extreme Value Theory would have resulted in losses of 13.2% YTD. Extreme Value Theory and its application to asset allocation, Dynamic Portfolio Optimization, would have prevented this level of loss because it uses recent Nobel winning concepts like GARCH instead of 50 year old ideas like MVO, and replaces normal distributions with stable distributions (log-based distributions with fat-tails that scale). Read Mandelbrots book 'The (Mis)behavior of Markets.