All the attention on dealer risk management obscures the fact that pension plans face completely different problems. So says Michael DeMarco, risk manager at GTE Investment Management in Stamford, Conn.

Demarco has been guiding GTE's highly advanced approach to its global investment portfolio. "The way pension fund risk managers look at risk is broader than the financial community of broker/dealers," he says. "Brokers are concerned about capital at risk, leverage and having too much concentration in one position. But that really isn't a dimension of risk problems for a pension fund manager, since a pension fund is an unlevered pool of capital. The objective is managing the composite performance benchmarks that show strategic asset allocation decisions." De Marco is concerned with the control of performance, instead of capital at risk.

De Marco also grapples with manager style risk, and uses equity derivatives as a hedge. De Marco found that all outside equity managers for GTE's $ 14 billion pension fund were bearish on Japanese stocks. Yet GTE's internal value models showed Japanese stocks are attractive. To resolve the conflict, De Marco used derivative strategies. "Rather than buy stock, we bought long call options on Japanese stocks. They went down further, but there was a rally as they neared expiration. After three months we converted half of the position into futures. Our views were corroborated with the markets." In time, GTE rolled out the remaining option position into futures, which they just unwound in the fourth quarter of 1996, since GTE's models turned negative on Japan.

Coincidence, or do great minds really think alike? Four days before Alan Greenspan sounded his apocalpytic alarm about an overvalued U.S. stock market, Panagora Asset Management chief investment strategist Edgar Peters said pretty much the same thing in a Wall Street Journal interview.

Peters' remarks didn't jolt the international markets, but they did illustrate the prognosticatory powers of a frontline soldier of the second generation of quantitative analysis who also happens to be an expert in chaos theory.

After working his way through Montclair State as a musician playing Manhattan clubs and coffee houses in the 1970s, Peters took a job as a computer programmer at Mutual Benefits Life. During lunch breaks, he explored the Newark library. " I realized I didn't know anything about investing, and started reading Berton Malkiel's book, A Random Walk Down Wall Street," says Peters. " I was a math major as an undergraduate and could apply math to investing. " No sooner said than done. He transferred into the investment department at Mutual Benefit and took a course at night with Harry Markowitz. " We did optimization by hand, so I know all its shortcomings."

Peters honed his quantitative talents while getting his MBA part-time at Rutgers University in Newark. Then it was on to the big time.

In the early '80s before computer trading was used, Peters worked for Interactive Data in New York putting together quantitative models. " There were no IBM-compatible PCs then, and the Apple II models were the most powerful. All quantitative analysis had to be done through timesharing a big database, which Interactive had," he says.

Peters stumbled into the earliest portfolio optimization models at that time. "In 1982, Lehman was trying to optimize their portfolios so they looked like index funds. They would arb the Value Line Index with their followed list which they held in inventory." Because Peters knew how to optimize the portfolio, Lehman and other brokers used Interactive's quantitative models.

In 1985 the young quant joined Panagora, where he came to specialize in tactical asset allocation, as well as chaos and fractal theory, comparing them to econometric models. But nowadays he applies his analytical skills to the art market as well. Peters is an avid collector of Twentieth Century Japanese wood block prints.

He comes by his interest naturally. His mother, who is Japanese, met his father when he was an American soldier wounded in Korea, recovering in Japan. Though raised in the States, Peters was always interested in Eastern culture.

What particularly intrigues him about woodblocks? "They represent good value, since they are museum quality and can be purchased for less than $1,000," says Peters.

In art as in stocks, this quant appreciates what's undervalued.

You're at a wedding. The flowers are beautiful, the guests excited. Unfortunately, you are the only person who knows that the groom is a no show. That is the position that Christopher Plona finds himself in with regard to the European Monetary Union (EMU).

Everyone else is on the bandwagon. Traders have voted for EMU by creating a convergence of European FX rates that seemed unlikely a year ago. Policy wonks and newspapers like the New York Times are declaring EMU a shoe in. But Plona says bunk. As a well-regarded consultant on financial futures and author of a new book, "The European Bond Basis" (Irwin), his skepticism is persuasive.

Plona's premise is that the German people have been gulled but will wake up next year from the trance Chancellor Kohl has put them in. Once they see their beloved super currency melded in with the lira and franc, and their revered Bundesbank mastery of fiscal integrity a thing of the past, they will rebel. "Kohl has a great deal of political capital invested in making this thing happen, but in the end the German people don't want to give up a strong currency," says Plona. "As soon as they see that the EMU is going to be a weak currency, and the criteria of entry for other countries is weakened, they will make their government use the neutron bomb on the EMU."

For those who believe him, Plona's trade recommendation (though he'd wait awhile to put it on) is to short Italian or Spanish government bonds and go long German governments, which can be done through futures. There has been enough convergence of the currencies to make the downside quite small, he believes, and the gains could be considerable. "Remember that it was only a year and a half ago that Italian bonds traded at a 300 to 400 basis point premium and that is where your upside is on the trade," he says.

Before setting up his present consulting firm, Risk Resources, Plona was director of financial markets at Gelderman (subsequently acquired by E.D. & F. Mann). Previously he was a trader for a hedge fund in the mid-1980s, traded derivatives for a portfolio manager in the Bay Area (where he now lives) and worked as interest rate risk consultant at KPMP.

"You know the story about the five blind men each of whom are given one part of the elephant to touch and then asked to describe the animal? Well, I've sold futures to clients, I've bought them as a client and as a hedger and an arbitrageur and been a consultant telling people how they work." His clients today include several banks and the London International Financial Futures Exchange (LIFFE).

But why is a Californian writing a book on European futures? "It is anticipation of even greater involvement by U.S. investors in Eurobond markets. It is going to happen, given the trend of international diversification." Plona cites another reason: "I don't think there is a book in the U.S. that focuses on how deeply basis risk is a part of almost every transaction in futures."