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Thought Leadership Papers
Mr. Frankfurter, MARI's Chief Investment Strategist, has collaborated on a top ten Social Science Research Network (SSRN) working paper entitled "Is Managed Futures an Asset Class? The Search for the Beta of Managed Futures." Links to this working paper and other academic research related to managed futures, commodities, derivatives and financial theory is available below:
Archive of Thought Leadership Papers:
Letters to Senator Joe Lieberman and Senator Susan M. Collins The Mysterious Case of the Commodity Conundrum, Securitization of Commodities and Systemic Concerns
Mack Frankfurter, Chief Investment Strategist (May 19, 2008)
The purpose of this letter is to provide a unique perspective in regards to speculation in the commodity futures markets, as well as outline some concerns regarding the current environment which has, of late, resulted in widespread debate regarding commodity prices. Justice Felix Frankfurter once said, "Judicial judgment must take deep account of the day before yesterday in order that yesterday may not paralyze today." It is with this thought in mind that I present my viewpoint.
Mack Frankfurter, Chief Investment Strategist (April 28, 2008)
The mysterious case of the commodity conundrum is sure to elicit passionate debate on either side of the equation—is the commodity boom due to speculation or fundamentals? Futures and forward contracts are intrinsically different instruments than securities which are derived from the capital markets (e.g., fixed income or equities). This is under-appreciated. Let me make clear here: I am a proponent of the speculators’ role. The function of speculators is required to facilitate the hedging utility and price discovery mechanisms. In my humble opinion, the career of commodity futures speculation is an honorable trade if practiced honorably. And in that context, yes, a reflexively driven fundamental case can be made for rising commodity prices. However, we cannot be sure of this unless we have a level playing field of properly regulated markets.
Is Managed Futures an Asset Class? The Search for the Beta of Managed Futures
Frankfurter, Mack and Accomazzo, Davide (SSRN eLibrary, December 31, 2007)
In comparing modern finance with behavioral finance, Dr. George Frankfurter, Lloyd
F. Collette Professor Emeritus Louisiana State University, and Dr. Elton McGoun, Professor of Finance Bucknell University, in their article "Resistance is Futile: The Assimilation of Behavioral Finance," make the following astute observation which can similarly be applied to our analysis of the various commodity asset pricing models we investigated: "What has happened is that we've used these assumptions for so long that we've forgotten that we've merely made assumptions, and we've come to believe that the world is necessarily this way." Likewise, our working paper, "Is Managed Futures an Asset Class? The Search for the Beta of Commodity Futures," suggests that the models we examined have inherent shortcomings when analyzing the commodity futures markets. Available at SSRN: http://ssrn.com/abstract=1029243
Resistance is Futile: The Assimilation of Behavioral Finance
Frankfurter, George M. and McGoun, Elton G. (Journal of Economic Behavior & Organization, 2002, vol. 48, issue 4, pages 375-389)
In the science-fiction television and film series Star Trek: The Next Generation, there is a species called the Borg, a collective of techno-organic drones acting in concert as a single organism. In their pursuit of perfection, they roam the galaxy in search of other species, whose capabilities they acquire through a process of assimilation turning their captives into Borg and effectively absorbing their knowledge into the hive mind. Modern finance itself appears to be something of a techno-organic life form, with inspired theoretical and empirical work combined with, and both augmented and circumscribed by, complex mathematics, massive data sets, and esoteric statistical tests. And the current encounter between modern finance and behavioral finance is not unlike the encounters between the Borg and the Starship Enterprise. Modern finance is attempting to assimilate behavioral finance, adding its capabilities, including a smattering of experimental methods, but without experiencing any fundamental changes in its own methodology―just as the Borg assimilate humans, acquiring their knowledge but destroying their humanity and turning them into drones.
Alpha, Alpha Whose got the Alpha?
Schneeweis, Thomas (University of Massachusetts, October 5, 1999)
Alice in Alice in Wonderland asked the Cheshire cat what path to take. The cat answered where she wanted to go. Alice replied that she had no idea. The cat responded, then it really doesn't matter which path you take. Managers must know which path they wish to take; that is, alpha as a marketing devise or as a measure of comparable risk/return performance. If managers wish to define alpha to fit their own marketing purpose and use alpha to sell a product, it is understandable. However, one should never mistake a 'marketing' alpha from a relative-performance alpha. If the manager can chose [sic] asset positions with a higher return (but the same ex ante risk) to some comparable naive investment position then that person can be said to achieve a positive alpha. Managers may say that investors' never care about relative return, but only absolute return. But performance alpha is all about properly measured relative return. Unfortunately, we have no simple method for establishing this benchmark except under vary restrictive situations. However, at least we do know that because any investment decision involves some risk, the riskless rate is probably not appropriate as a benchmark. How much return should be added and what method should be used to determine the incremental return to add to the risk free rate to obtain the appropriate return comparison is still open for discussion. Despite the difficulty it is an attempt worth the effort.
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