There was an important omission from your extensive article on significant developments in our industry over the 40 years P&I has been publishing (“Witness of a revolution,” Pensions & Investments, Oct. 14).
I refer to the downside-risk statistic and its attendant applications. These include the Sor-tino ratio for investment-performance measurement and downside-risk optimization for portfolio construction, tools that we have offered since 1985 and which are now also being distributed by other financial-technology firms.
These tools have widespread, worldwide use throughout the industry, where the Sortino ratio has replaced the Sharpe ratio as the risk-adjusted measure of choice. For portfolio construction, downside-risk optimization offers a multitude of benefits over traditional mean-variance optimization, not the least of which is the ability to more accurately model asymmetric, non-normal return distributions. This modern portfolio theory limitation can be crucial when considering assets such as hedge funds, derivatives, commodities and the like whose essential characteristic is often that their return distributions are (purposefully) skewed away from the normal.
In conclusion: Downside risk and its related statistics have collectively come to be known as post-modern portfolio theory, or PMPT. For those interested in further information, Google and Wikipedia are productive sources.
BRIAN M. ROM
President and founder
Investment Technologies
New York
