Portfolios - EDHEC-Risk

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What Separation Theorems Say and Do not Say • This approach is sometimes known as core-satellite investing, and in essence strictly similar to LDI when the benchmark is a liability-driven benchmark. • Now, this approach works even better when the TE of the satellite portfolio is “well-behaved”; a concern over VaTER in particular would lead to a severe opportunity cost. • Therefore, when designing the alternatively weighted satellite part, it is still useful to maximise the Sharpe ratio subject to suitably defined (relatively loose, e.g., 5%) TE constraints. • Adding beta constraints (with respect to a number of betas that may vary as a function of market conditions) is particularly effective in controlling for VaTER. 30
Impact of Relative Risk Control • Extreme tracking error is markedly lower for the relative risk controlled portfolios (ex-ante TE target: 3%). Minimum Volatility Without Relative Risk Control Maximum Sharpe Ratio Diversified (50% Minimum Volatility + 50% Maximum Sharpe Ratio) Minimum Volatility With Relative Risk Control Maximum Sharpe Ratio Diversified (50% Minimum Volatility + 50% Maximum Sharpe Ratio) Expected Return over CW 1.29% 1.42% 1.35% 0.79% 1.18% 0.99% Information Ratio 0.47 0.51 0.50 0.44 0.52 0.54 Modified IR 0.23 0.28 0.27 0.25 0.29 0.30 Median Relative Return 1.06% 1.46% 1.35% 0.67% 1.14% 1.12% 5% Relative Return ‐4.49% ‐4.35% ‐4.32% ‐2.94% ‐3.60% ‐3.15% Min Relative Return ‐12.01% ‐10.57% ‐11.29% ‐8.45% ‐7.05% ‐7.68% Median Tracking Error 2.08% 2.15% 2.05% 1.53% 1.87% 1.51% 95% Tracking Error 5.60% 5.09% 5.07% 3.09% 4.03% 3.26% Max Tracking Error 8.69% 8.36% 8.51% 4.48% 5.20% 4.77% Max Relative Drawdown 22.96% 21.05% 21.83% 15.78% 14.65% 14.88% Start t Date 16‐sept‐93 24‐mar‐94 7‐oct‐93 16‐sept‐93 22‐sept‐94 24‐mar‐94 End Date 24‐mar‐00 24‐mar‐00 24‐mar‐00 24‐mar‐00 24‐mar‐00 24‐mar‐00 Weekly ValueatTracking Error Risk (VaTER) ‐0,54% ‐0,55% ‐0,54% ‐0,38% ‐0,45% ‐0,38% Max TUW (weeks) 340 313 337 340 287 313 Prob of Outperformance (1Y Rel Return) Prob of Outperformance (3Y Rel Return) 66.00% 65.03% 67.09% 64.65% 64.95% 67.47% 75.96% 75.84% 76.86% 76.31% 70.84% 76.39% 31
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 20 and 21: Selection Risk - Relative Returns
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 32 and 33: Impact of Relative Risk Control Pan

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