Introducing an Important Book
on Stock Market Crashes
by Bruce I. Jacobs

Ethical Issues

Capital Ideas and Market Realities:
Option Replication,
Investor Behavior,
and Stock Market Crashes

By Bruce I. Jacobs,
co-founder and principal of Jacobs Levy Equity Management

With a Foreword by Harry M. Markowitz, Nobel Laureate

Ethical Issues Raised by the Treatment of Capital Ideas and Market Realities by the Association for Investment Management and Research (since renamed the CFA Institute)

Capital Ideas and Market Realities (CIMR) describes how the option replication strategy known as portfolio insurance (and subsequent dynamic hedging strategies) drew investors with the dubious promise of high, equity-like returns at little or no risk. As investors flocked to portfolio insurance in the 1980s, they pushed stock prices above fundamentals; when reality began to reassert itself in the fall of 1987, prices began to fall; insured investors flooded the market with sell orders, turning what might have been a modest correction into a crash even greater than the Great Crash of 1929.

CIMR grew out of papers I had written in the 1980s, describing how portfolio insurance could fail to deliver on its promises and even destabilize the broad market. These had been submitted to several journals, including Financial Analysts Journal (FAJ), where they had been reviewed by Mark Rubinstein. Rubinstein, a member of the journals' editorial boards, was also a cofounder of Leland O'Brien Rubinstein Associates (LOR), which managed over $50 billion in portfolio insurance assets at the time of the crash. On the bases of his reviews, the journals declined to publish my submissions.

Given this history, I was very pleasantly surprised to see a quite favorable review of CIMR in the July/August 2000 issue of FAJ. Book review editor Martin Fridson stated: "Jacobs' meticulously documented book presents compelling evidence . . . that portfolio insurance failed to deliver on its lofty promises." In the January/February 2001 issue of FAJ, however, Fridson published an unprecedented "Postscript" to this review. In an abrupt about-face, the "Postscript" charged that I "marshaled selected quotations to suggest that promotions in the early 1980s by Leland O'Brien Rubinstein Associates (LOR) led investors to believe that its portfolio insurance product placed an absolute floor under their potential returns." On the contrary, he asserts, on the basis of various unnamed sources, "LOR's pre-1987 presentations were candid in describing the likely impact [on the strategy] of greater-than-expected [market] volatility."

I was allowed a brief response to the charges in Fridson's "Postscript" in the May/June 2001 issue of FAJ ("Postscript: Author's Comment"). My original reply ("The Marketing of Portfolio Insurance and the Magnification of Market Risk: The Whole Story") had to be cut substantially in order to meet the FAJ's space constraints. Space in that same issue was nevertheless available to afford yet another comment from Fridson ("Postscript: Reviewer's Response"). Fridson essentially concluded that "sophisticated investors who knew the right questions to ask would not have been misled" by LOR's marketing.

Yet the latter statement is directly antithetical to securities law. Section 206 of the Investment Advisers Act of 1940 holds that "caveat emptor" is not an adequate standard of disclosure for investment professionals, and the U.S. Supreme Court decision in SEC v. Capital Gains Research Bureau, Inc. (1963) explains why: Full and forthright disclosure is required to protect investors from the type of abuses that led to the great crash of 1929. I pointed this out in a letter to the editor ("Response to Fridson's 'Postscript: Reviewer's Response'"), which FAJ Editor Gifford Fong declined to publish.

In June of 2001, Pensions & Investments (P&I) published an article ("Praise for book turns to criticism") in which Rubinstein admitted that it was he who had "suggested" to Fridson that Fridson write a "correction" of his original review of CIMR (contrary to Fridson's assertion in "Postscript: Reviewer's Response" that his anonymous sources "had no obvious reason either to attack Jacobs or defend LOR"). FAJ Editor Fong asserts in this article (apparently unaware of Rubinstein's admission): "If there was pressure from someone on the editorial board, I would see that person would not be on the board." Fong nevertheless claimed in a follow-up article in P&I ("Rubinstein to stay on editorial board of FAJ despite talking with Fridson") that "The real question is: Was Mark acting in his capacity as an editorial board member?" Rubinstein was not dismissed.

In the fall of 2001, I posted an "Open Letter to AIMR and the Financial Analysts Journal," which documented apparent violations by certain members of the FAJ editorial board of all five professional conduct standards of the Association of Investment Management and Research (since renamed the CFA Institute). This letter also documented violations of securities law and AIMR standards by LOR, including its marketing of portfolio insurance as a "guaranteed equity investment" and its failures to adequately disclose the risks of the strategy. The ethical issues involved, including AIMR's tacit endorsement of a caveat emptor standard of disclosure and the conflicts of interest underlying FAJ's editorial process, were further discussed in a series of letters published in P&I in the fall of 2001.

A little less than a year later, in July 2002, AIMR publicly proposed a set of Research Objectivity Standards for buy- and sell-side analysts, their firms, issuing corporations, and the media, designed to curb conflict-of-interest problems in the investment industry. My response ("Bruce Jacobs Comments on AIMR's Proposed Research Objectivity Standards, Recommending that AIMR adopt such Standards for its own Publications") called on AIMR to put their own house in order by instituting conflict-of-interest and other standards for their own publications. This recommendation was picked up by The Wall Street Journal ("Bids & Offers: Analyst, Heal Thyself") and supported by letters from several AIMR member societies. This support was noted in an editorial in Global Investor, which concluded that, "the spirit of full transparency and objectivity has not been well served" by AIMR in its handling of this matter.

Soon afterward, AIMR issued a press release ("AIMR Announces New FAJ Editor and New Conflict-of-Interest Policies") announcing that it had completed a review of FAJ's standards, policies and practices and found them in compliance with "best practice" and in keeping with AIMR's code and standards; the release went on to state that the ethical obligations and conflict-of-interest policies governing FAJ would be published in an upcoming issue. It also announced the appointment of a new editor for FAJ. (Somewhat surprisingly, AIMR had not formally announced the departure of Fong, although P&I had reported it.)

In view of AIMR's newfound interest in setting conflict-of-interest standards for itself and others, I submitted to FAJ a letter to the editor ("Investment Advisory Disclosure Standards and Financial Analysts Journal Conflict-of-Interest Policies") setting forth violations of AIMR conflict-of-interest and other standards at FAJ. In a cover letter to the AIMR board, I pointed out that publication of the letter would benefit readers by clarifying the standards of disclosure investment professionals are required to abide by and benefit AIMR and FAJ by allowing FAJ to proceed with a clean slate under its new editor and newly announced policies. (AIMR's general counsel later informed me that the letter would not be published.) In "AIMR and 'best practices' on ethics" (P&I, December 9, 2002), however, I question whether FAJ will opt for transparency and objectivity, given its history, and suggest that AIMR take a page from the medical journals, which provide for a full airing of questionable acts via letters and editorial commentary. Should FAJ accept anything less than this as "best practice"?

The whole debate revolving around FAJ, going back to my original submission to the journal in the 1980s, raises extremely troubling questions about the conduct of the FAJ's editor, and members of its editorial board. In addition, it raises questions about the AIMR's supervision of FAJ, and its willingness, or ability, to hold its officials and staff to the same high standards demanded of its members. What level of disclosure, on the part of investment advisers and managers, would AIMR desire to see promulgated in its own publications? What standards of behavior would AIMR expect its officials and staff to follow?

In January 2003, AIMR finally published the conflict of interest policies governing FAJ. AIMR is to be applauded for creating and disclosing these standards, and it is to be hoped that they will go a long way toward mitigating the pernicious effects of conflicts of interest. However, AIMR could have aimed for more transparency and more effective policies to govern its premier research publication.

The articles synopsized below, roughly arranged in reverse chronological order, give a more detailed view of the ethical issues raised by AIMR's treatment of CIMR. Where noted, the actual articles may be accessed directly. Some additional material may be found in the "Research & Reviews" section of this website.


  "Letter from AIMR General Counsel William P. McKeithan regarding 'Investment Advisory Disclosure Standards and Financial Analysts Journal Conflict-of-Interest Policies,'" December 13, 2002.

      The Association for Investment Management and Research's (AIMR's) General Counsel advises that Bruce Jacobs's "Investment Advisory Disclosure Standards and Financial Analysts Journal Conflict-of-Interest Policies" will not be published in Financial Analysts Journal (FAJ), although his "comments and suggestions on conflicts and the appearance of conflicts are thoughtful and are being considered by AIMR and the Journal editor." The following issues thus remain outstanding:

• FAJ has never disclosed the conflicted roles Mark Rubinstein played both in rejecting manuscripts about portfolio insurance in the 1980s and in influencing the book review process in 2001 (despite AIMR's assertion that "sunlight is the best disinfectant" when it comes to conflicts of interest ["AIMR Recommends 10 'New Year's Resolutions' for Investment Community," December 31, 2002])
  • Does FAJ mean to condone conflicts of interest on the part of its board members that influence the content and substance of what it publishes?
• FAJ has never corrected the false impression left by Martin Fridson's statement about "sophisticated investors who knew the right questions to ask," which he employed to condone Leland O'Brien Rubinstein Associates (LOR) marketing practices and attack Bruce Jacobs and his book.
  • Does FAJ mean to endorse Fridson's "caveat emptor" standard of disclosure as well as LOR's marketing techniques (including use of the phrase "guaranteed equity investment"), which appear to be diametrically opposed to federal securities law, as well as AIMR's own standards?
  • Shouldn't FAJ be reinforcing the fact that federal securities law mandates full disclosure in order to protect investors from the pernicious consequences of abuses in the securities industry? The U.S. Supreme Court decision in SEC v. Capital Gains Research Bureau, Inc. (1963) so justifies the strict disclosure requirements imposed on the securities industry by the Investment Advisers Act of 1940.

  "AIMR and 'Best Practices' on Ethics," by Bruce I. Jacobs, Pensions & Investments, December 9, 2002. article

      Financial Analysts Journal's newly appointed editor, Robert Arnott, has announced his commitment to ensuring that the journal is "open and transparent"; yet Arnott states that transparency should stop short of "airing dirty linen." FAJ has stopped short in the past. In the May/June 2001 issue, for example, the book review editor left investment practitioners with the false impression that disclosure by investment managers is adequate so long as "sophisticated investors who [know] the right questions to ask" would not be misled. The implication that investment advisors are held to a "caveat emptor" standard of disclosure is antithetical to securities law, which requires full disclosure. The journal has yet to enlighten its readers about the inaccuracy of the book reviewer's statement. Nor has the FAJ ever disclosed that a member of its own editorial board with a blatant conflict of interest had influenced its book review editor to retract a prior favorable review of a book. Standard practice at medical journals provides for a full airing of questionable actions via letters and editorial commentary. Should professional investors expect anything less?


  "Letter to AIMR Board of Governors regarding 'Investment Advisory Disclosure Standards and Financial Analysts Journal Conflict-of-Interest Policies,'" by Bruce I. Jacobs, November 21, 2002 letter ; "Letter to the Editor: Investment Advisory Disclosure Standards and Financial Analysts Journal Conflict-of-Interest Policies," by Bruce I. Jacobs, November 21, 2002. letter

      In “Letter to AIMR Board of Governors regarding ‘Investment Advisory Disclosure Standards and Financial Analysts Journal Conflict-of-Interest Policies,’” Bruce Jacobs explains why Financial Analysts Journal (FAJ) should publish his letter to the editor on “Investment Advisory Disclosure Standards and Financial Analysts Journal Conflict-of-Interest Policies”; he refers readers to examples that illustrate “best practices” in the medical community and its journals. The letter to the editor itself details the ways in which the standard of disclosure set forth by FAJ book review editor Martin Fridson in his “Postscript: Reviewer’s Response (FAJ, May/June 2001) (i.e., “sophisticated investors who knew the right questions to ask”) violates both U.S. securities law and the standards set by the FAJ’s parent, the Association for Investment Management and Research (AIMR). Jacobs goes on to describe how other violations of AIMR standards, specifically conflict-of-interest protocols, were violated at FAJ.


  "Fong's departure raises concerns," Pensions & Investments, September 2, 2002 article; AIMR Announces New FAJ Editor and New Conflict-of-Interest Policies, November 11, 2002. announcement

      In September of 2002, Pensions & Investments (P&I) reports that H. Gifford Fong will be leaving the editorship of Financial Analysts Journal (FAJ), although the Association for Investment Management and Research (AIMR) had not made a formal announcement. P&I notes that Fong, editor since 1998, is not currently a member of AIMR, hence is under no obligation to attest to his observance of AIMR's code of professional conduct. In a press release on November 11, 2002, AIMR announces the appointment of a new editor of FAJ. The release also notes that AIMR has completed a review of the FAJ's standards, policies and practices and found them in compliance with best practice and in keeping with AIMR's Code of Ethics and Standards of Professional Conduct. AIMR President and CEO Thomas A. Bowman goes on to state that, "building on that foundation, we will be publishing FAJ's ethical obligations and conflict-of-interest policies in an upcoming issue of the journal. In addition, we will put our existing conflict-of-interest policies into agreements that all staff and volunteers working on the journal will be required to sign."


  "AIMR's Objectivity Lesson," Global Investor, November 2002. article

      This editorial piece notes that Bruce Jacobs's "two-year crusade to bring to light . . . 'very clear conflicts of interest' at the heart" of the Association for Investment Management and Research (AIMR) has attracted support from some heavy hitters, including Jose Arau of CalPERS, who backs Jacobs's call for AIMR to adopt internal research objectivity standards. AIMR Senior Vice President Katrina Sherrerd defends their practices, noting that the Financial Analysts Journal (FAJ) uses a blind peer review process. (But not knowing an author's identity does not prevent an editorial board reviewer from recommending rejection due to a conflict of interest with the contents and substance of a manuscript.) Ms. Sherrerd also notes that FAJ has published "a number of Jacobs's letters of complaints" (in fact, the FAJ published just one letter of complaint from Jacobs). She adds that AIMR is reviewing its policies, including Jacobs's proposal for internal objectivity standards. Global Investor concludes that "the spirit of full transparency and objectivity has not been well served."


  Letters in Support of Bruce Jacobs's Proposal for AIMR to adopt Research Objectivity Standards for its own Publications

      Jose Arau, CalPERS Principal Investment Officer and President of the Security Analysts of Sacramento, urges AIMR to adopt the Internal Research Objectivity Standards that Bruce Jacobs has proposed. He writes: "We believe a transparent editorial policy, where all potential conflicts of interest are disclosed, would ensure a level of fairness and integrity in AIMR publications and conferences that would redound to the benefit of all AIMR members and, indeed, all participants in the financial markets." Deborah J. Weir, President of the Stamford Society of Investment Analysts, and Alexander Singer, President of the Hellenic Association of Investment Professionals, also write in support of extending the ROS initiative to AIMR's publications and conferences.


  "Bids & Offers: Analyst, Heal Thyself," by William Power and Kate Kelly, The Wall Street Journal, September 13, 2002. article

      In a September 13, 2002 column, The Wall Street Journal reports on Bruce Jacobs’s response to AIMR’s Research Objectivity Standards. Jacobs finds it hypocritical of AIMR to ask Wall Street to adopt standards that the association itself neither abides by nor enforces when it comes to its own activities. In responding to Jacobs’s comments, AIMR says it intends to abide by any new standards. However, AIMR apparently did not consider it necessary to enforce existing standards when a member of its own journal’s editorial board improperly influenced that journal’s coverage of a product in which he held substantial financial and reputational stakes.


  "Bruce Jacobs Comments on AIMR's Proposed Research Objectivity Standards, Recommending that AIMR adopt such Standards for its own Publications," August 12, 2002. letter

      In July 2002, the Association for Investment Management and Research (AIMR) proposed new Research Objectivity Standards for buy- and sell-side analysts and their firms, corporate issuers, and journalists and the media, designed to deal with conflicts of interest that can taint investment research and harm investors. Bruce Jacobs finds the same types of conflicts of interest at work within AIMR itself. In particular, AIMR's own publications and conferences can be seen to fulfill a role analogous to that of Wall Street research analysts. The AIMR's Financial Analysts Journal (FAJ), for example, publishes articles that can form the basis for investment research tools, quantitative analysis, and portfolio decision-making in the real world. Yet the review process that determines what gets published in FAJ (and what doesn't) is fraught with conflicts of interest that jeopardize the integrity of the research it publishes. The authors and readers of FAJ and AIMR's other publications, as well as the investment community in general, would benefit greatly by AIMR's adoption of a clear, publicly stated policy explicitly governing internal conflicts of interest. Bruce Jacobs suggests some specific standards.


  "FAJ, AIMR Ethical Issues," by Bruce I. Jacobs, Pensions & Investments, October 1, 2001; "AIMR Strict on Ethics Code," by Patricia Doran Walters, Pensions & Investments, October 15, 2001; "AIMR’s Misinterpretation," by Bruce I. Jacobs, Pensions & Investments, November 12, 2001. letters

      Should members of a journal's Editorial Board be allowed to review articles about products in which they have direct financial interests? Should they be allowed to influence the journal's book review process, when the books being reviewed relate to those products? Should journal editors publish statements that are clearly antithetical to securities law? In an October 1 letter to Pensions & Investments, Bruce Jacobs raises these questions with regard to the Financial Analysts Journal and its publisher, the Association for Investment Management and Research (AIMR), and asks whether AIMR, as the preeminent standard-setting body for investment professionals, shouldn't hold its own officials and staff to the same high standards it requires of its members.
      In her October 15th response, AIMR spokesperson Patricia Doran Walters states that AIMR does not comment publicly on professional conduct complaints unless the matter results in a public sanction of an AIMR member. Jacobs makes the point, in a November 12 letter, that the AIMR provides exceptions to the level of confidentiality described by Walters, which may be applicable to the issues at hand. Furthermore, while appropriate for complaints involving individual AIMR members, blanket confidentiality seems inappropriate when applied to complaints involving the manner in which AIMR and the FAJ, as organizations, conduct themselves; to be worthy of the confidence of AIMR members and FAJ readers, AIMR must make clear the standards that govern the FAJ and be seen to enforce them rigorously.


  "An Open Letter to AIMR and the Financial Analysts Journal," by Bruce I. Jacobs, October 1, 2001. letter

      This open letter to the Association for Investment Management and Research (AIMR) and the Financial Analysts Journal (FAJ) documents apparent material violations of all five of AIMR's Standards of Professional Conduct committed by certain members of the editorial board of the FAJ. In particular, Mark Rubinstein, a member of the FAJ's Editorial Board, is allowed to review (and reject) papers that are critical of his own firm's investment products and the egregious methods used to market them (which appear to violate securities law). FAJ's Book Review Editor, Martin Fridson, writes an unprecedented repudiation of his prior favorable review of a book criticizing those products, apparently at Rubinstein's behest. Editor Gifford Fong refuses to investigate the matter and curtails the discussion in the pages of the FAJ, leaving readers with the impression (contrary to securities law and AIMR standards) that disclosure by investment advisers is adequate as long as "sophisticated investors who [know] the right questions to ask" would not be misled.
      These actions violate AIMR standards which, among other things, require members to be familiar with and abide by securities laws and to avoid conflicts of interest. Unless the AIMR is seen as willing to uphold securities laws and its own standards and to confront ethical issues fairly and unequivocally, it risks undermining investor confidence in the organization, in the investment profession, and in capital markets worldwide.


  "Praise for Book Turns to Criticism," by Barry B. Burr, Pensions & Investments, June 25, 2001 article, and "Rubinstein to Stay on Editorial Board of FAJ Despite Talking with Fridson," by Barry B. Burr, Pensions & Investments, September 3, 2001. article

      "Praise for book . . ." looks at the issues surrounding Financial Analysts Journal's treatment of Bruce Jacobs's book, Capital Ideas and Market Realities. Asked why he wrote and published an unprecedented re-review of the book, FAJ book review editor Martin Fridson cited "feedback generated by the review." An investigation by Pensions & Investments, however, revealed that Mark Rubinstein, whose firm's strategies the book is critical of, "suggested Fridson consider writing a 'correction' to his original review." "Rubinstein to stay on editorial board . . ." reports that FAJ editor H. Gifford Fong will retain Rubinstein on the journal's editorial board, despite his earlier assertion (in "Praise for book . . .") that "If there was pressure from someone on the editorial board, I would see that person would not be on the board anymore." P&I also reports, in these two articles, on the controversy surrounding Fridson's statement (in the May/June 2001 issue of FAJ) that disclosure by a particular portfolio insurance vendor was adequate because "sophisticated investors who knew the right questions to ask would not have been misled." Jacobs asserts that this statement leaves readers with the idea that "caveat emptor" is an adequate standard for investment professionals; but "caveat emptor" as a standard of disclosure, Jacobs notes, is contrary to the AIMR Code of Ethics and Standards of Professional Conduct, as well as to securities law. Editor Fong and Patricia Doran Walters, the professional conduct officer of AIMR, nevertheless downplay Fridson's statement, noting, respectively, that "it's only a book review" and "no one is giving anyone investment advice in the journal."


  "Postscript: Author's Comment," by Bruce I. Jacobs, Financial Analysts Journal, May/June 2001 comment; "Postscript: Reviewer's Response," by Martin Fridson, Financial Analysts Journal , May/June 2001 comment; "Response to Fridson's 'Postscript: Reviewer's Response,'" by Bruce I. Jacobs, June 20, 2001. letter

      In "Postscript: Author's Comment," Bruce Jacobs points out that Martin Fridson's "Postscript" (Financial Analysts Journal, January/February 2001) does a disservice to his book, Capital Ideas and Market Realities (CIMR), and to investors generally by dismissing the book's presentation of the way portfolio insurance was marketed; it is just such marketing, creating the false impression that such strategies offer high returns at low risk, that allows these strategies to attract investments sufficient in size to threaten market stability. Jacobs further notes that, in contrast to the anonymous "sources" Fridson uses to support his claims, CIMR provides extensive quotations from, and references to, hundreds of named sources. In "Postscript: Reviewer's Response," Fridson states that because the professionals he consulted for his "Postscript" "were neither purveyors of portfolio insurance nor investors who ultimately decided to buy the product," they had "no obvious reason either to attack Jacobs or defend Leland O'Brien Rubinstein Associates [LOR]." "Based on their detailed accounts," he concludes, "sophisticated investors who knew the right questions to ask would not have been misled" by LOR's marketing. In "Response to Fridson's 'Postscript: Reviewer's Response'" (which FAJ declined to publish), Jacobs points out that, given Fridson's standard of "sophisticated investors," it is perhaps not surprising that his "Postscript" found that LOR was "candid in describing the likely impact of greater-than-expected volatility." But, Jacobs goes on to point out, Section 206 of the Investment Advisers Act of 1940 holds that caveat emptor is NOT an adequate standard for the securities industry.


  “The Marketing of Portfolio Insurance and the Magnification of Market Risk: The Whole Story,” by Bruce I. Jacobs www.cimrbook.com, 2001. (The complete text of the abbreviated “Postscript: Author’s Comment,” Financial Analysts Journal, May/June 2001.) complete text

      In the January/February 2001 issue of Financial Analysts Journal (FAJ), Book Review Editor Martin Fridson published an unprecedented "Postscript" to his original, favorable review (FAJ, July/August 2000) of Bruce Jacobs's book, Capital Ideas and Market Realities. In his initial review, Fridson called the latter a "meticulously documented book [that] presents compelling evidence . . . that portfolio insurance failed to deliver on its lofty promises." In his "Postscript," Fridson charges that the book "marshaled selected quotations" to show that the marketing efforts of Leland O'Brien Rubinstein Associates (LOR) exaggerated the benefits and downplayed the risks of portfolio insurance to a misleading degree. Instead, he claims, "LOR's pre-1987 presentations were candid in describing the likely impact [on the strategy] of greater-than-expected [market] volatility."
      Fridson bases his conclusion on a single reference (to a Mark Rubinstein article) and on unnamed "observers," "investment professionals," and "sources." Capital Ideas and Market Realities, by contrast, cites hundreds of named sources, including almost all published articles, advertisements, and marketing materials on the subject. That evidence, as well as new evidence, including LOR's ADV filings with the Securities and Exchange Commission, suggest that LOR's disclosures were not adequate and apparently violated securities law (Section 206 of the Investment Advisers Act, which prohibits advertising that is false and misleading). As a result, many investors were not aware of the strategy's pitfalls. Rather, marketing that portrayed the strategy as a means of obtaining high (equity-like) returns at low (below equity level) risk--with a credible guarantee of a minimum return level--helped to create a faddish demand for portfolio insurance, leading to $100 billion in "insured" assets by the fall of 1987. The enormous magnitude of required insurance selling on October 19, 1987, turned what might have been a modest correction into a crash even greater than the Great Crash of 1929.
      That crash did not "kill" portfolio insurance; the concepts behind it and the methods by which it was "sold" live on in strategies at work in markets today. The dynamic hedging underlying option positions is essentially the same as portfolio insurance, and has contributed to "minicrashes" in 1989, 1991, 1997 and 1998. The sad story of Long-Term Capital Management shares much with the portfolio insurance story, including the concentration of significant amounts of assets in a strategy that was supposed to offer high returns for very little risk; the strategy's dependence on arbitrage conditions; and, when such conditions disintegrate, the effects of the strategy's forced selling on market volatility. If investors are to have any hope of mitigating the ill effects of such strategies, full and candid disclosure of their real risks is imperative; Fridson's "Postscript" ill serves investors by obfuscating these risks.


  "Book Review," by Martin Fridson, Financial Analysts Journal, July/August 2000 review ; "Postscript," by Martin Fridson, Financial Analysts Journal, January/February 2001. review

      In the review of Bruce Jacobs's Capital Ideas and Market Realities (CIMR) published in the July/August 2000 issue of Financial Analysts Journal (FAJ), book review editor Martin Fridson stated that the book "astutely sizes up the continuing search for what [Jacobs] labels 'the Northwest Passage of no-risk reward'" and called it a "meticulously documented book [that] presents compelling evidence . . . that portfolio insurance failed to deliver on its lofty promises." In the January/February 2001 issue of FAJ, however, Fridson published a "Postscript," in which unnamed "observers," "investment professionals," and "sources" attack CIMR's presentation of the way in which portfolio insurance was marketed by its primary vendor, Leland O'Brien Rubinstein Associates (LOR), which had over $50 billion in portfolio insurance assets under management in the 1980s. According to these sources, LOR mentioned the highly favorable outcome that the cost of insurance could be negative only as a "possibility, not a likelihood." The "Postscript" concludes that CIMR "marshaled selected quotations" to make its case.

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