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The importance of academic research in the money management industry is growing by leaps and bounds, spurred by use of more complex strategies
Ever since Harry Markowitz related the risk of an individual security to the entire portfolio in 1952, academics have played a growing role in how money is managed.
Sure, it took a long time for the early academic work to catch on. The ideas of Mr. Markowitz who shared the 1990 Nobel Memorial Prize in Economic Sciences with William F. Sharpe and Merton Miller - weren't put into practice until the early 1970s.
Now, managers - particularly those with a quantitative bent - often glom onto new academic ideas before they're published.
Sometimes, an idea's application to money management is not apparent.
"A theoretical paper may not immediately have an obvious impact on the way we manage money, but it could lead to a breakthrough in terms of money management. The most innovative ideas will have an impact on what we do in finance," said Campbell Harvey, principal at Smith Breeden Associates Inc., Chapel Hill, N.C., and editor of the Journal of Finance.
As managers add shorting, credit default swaps and other instruments to their repertoire, they might need more than ever to rely on academic research to guide their portfolio allocation or trading decisions.
"There is a greater need today for academic research, in particular on the risk management side, due to the complexity of investments," said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co., Jersey City, NJ., with $100 billion in assets under management.
There's also a huge demand for new research on credit risk - brought on by the credit crisis that started last summer. Research on contagion among different credit markets and hedge funds during volatile periods also is drawing investor interest. Plus, managers keep looking for new types of trading strategies that can generate incremental returns.
And, of course, behavioral finance continues to generate new indicators of investor sentiment and behavior that affects markets, whether it's tied to negative newspaper columns, "old school" ties between top management and asset managers or whether certain stocks and groups of stocks are more sensitive to mispricing than others.
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