Portfolios - EDHEC-Risk

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Selection Risk – Relative Returns • Depending on market conditions, different strategies work differently; he worst performing strategy in one sub-period can turn out to be the best performer in subsequent sub-period period. Subperiod MSCI USA Minimum Volatility Index FTSE EDHEC Risk Efficient US Index 2003 (JanJun) ‐4.72% 2.46% 2003 (JulDec) ‐2.93% 3.46% 2004 (JanJun) 0.05% 3.28% 2004 (JulDec) 2.64% 3.18% 2005 (JanJun) 4.58% 3.95% 2005 (JulDec) ‐3.85% 2.04% 2006 (JanJun) ‐0.70% 0.82% 2006 (JulDec) ‐2.54% ‐2.30% 2007 (JanJun) ‐1.63% 2.06% 2007 (JulDec) 1.51% ‐3.31% 2008 (JanJun) 0.38% 1.46% 2008 (JulDec) 10.10% ‐2.40% 2009 (JanJun) ‐4.10% 7.58% 2009 (JulDec) ‐3.75% 6.96% 2010 (JanJun) 1.67% 3.73% 2010 (JulDec) ‐2.06% 2.26% 2011 (JanJun) 4.01% 3.39% 2011 (JulDec) 6.36% ‐2.32% The table shows excess return over the cap‐weighted index (the S&P 500 index) of MSCI USA Minimum Volatility Index and FTSE EDHEC Risk Efficient US Index computed over 16 half yearly sub‐periods. Weekly return data from 3 January 2003 to 30 December 2011 is used for the analysis. 20
Selection Risk – Relative Perspective • Periods of very pronounced underperformance occurred for each of these indices, as can be seen from extremely high values for max relative drawdowns and extreme annual tracking error. Risk Measures MSCI USA Minimum Volatility Index FTSE EDHEC Risk Efficient US Index Max relative drawdown 12.23% 8.43% Start date 21‐nov‐08 21‐apr‐06 End date 23‐apr‐10 21‐nov‐08 Annualised excess Return over capweighted index 1.21% 3.75% Tracking Error (TE) 5.69% 3.82% Extreme Tracking Error (95 th percentile of rolling one year TE) 7.42% 6.72% 21
Page 2 and 3: EDHEC-Risk Days 2012 London, March
Page 4 and 5: Managing Investments t in Alternati
Page 6 and 7: • Alternatives to Cap-Weighted In
Page 8 and 9: Indices versus Benchmarks • The w
Page 10 and 11: Fundamental Weighting for Represent
Page 12 and 13: Scientific Approaches: Towards the
Page 14 and 15: Implementing the Diversifiers • E
Page 16 and 17: Giving Up Smartly - MSR • How to
Page 18 and 19: Ad-Hoc Approaches: Maximum Diversif
Page 22 and 23: Diversifying the Diversifiers - Lon
Page 24 and 25: Tracking Error Across Market Condit
Page 26 and 27: • Alternatives to Cap-Weighted In
Page 28 and 29: Tracking Error Constraints • If w
Page 30 and 31: What Separation Theorems Say and Do
Page 32 and 33: Impact of Relative Risk Control Pan

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