[Book] Advanced Portfolio Management – A Quant’s Guide for Fundamental Investors

Great book, I absolutely recommend. Precise and concise (less than 200 pages). This book will especially be useful to grads or analysts in the early stages of their career. A junior analyst/quant/data scientist who masters the content of this book will definitely be useful in a pod of fundamental discretionary portfolio managers and analysts.

This book won’t teach you anything about how to source and develop trade ideas; It will simply assume that you have an edge in predicting future excess returns (for stocks), or at least selecting a basket of stocks that have high chance to beat the market. Given this predictive edge, still many things can go wrong between the trade ideas and the portfolio performance: poor sizing and timing, unrealistic returns/risk targets, unsuitable leverage, and ultimately hitting stop-losses before the realization of your edge. The book aims at giving fundamental investors some heuristics (based on quant methods) to avoid these pitfalls.

Much of the book advocates using fundamental factors risk models (such as MSCI Barra or Axioma) to monitor your exposure to the main risk factors (i.e. country, sector, size, short interest, hedge fund holdings, momentum, reversal, value, growth). Fundamental investors are supposed to select stocks for idiosyncratic reasons, and thus should hedge the exposures to the market/technical/style factors which they have no particular skills at trading. These factors taken altogether explain a significant fraction of stocks’ volatility: Being exposed to them without a careful and informed positioning can cause important drawdowns in a fundamental investor’s portfolio (especially when quants are deleveraging). The book proposes simple procedures (without the need of an advanced portfolio optimizer) to hedge the unwanted risk factors.