Multi-asset teams in the asset management industry already have to contend with implementing investment strategy across numerous portfolios whose opportunity sets may vary considerably. The advent of fintech via the development of robo-advisory strategies potentially creates further demand for a capability to industrialise asset allocation advisory for multiple portfolios. An efficient and robust framework to implement investment views in portfolios on an industrial scale is likely to be critical in the future.
In this new white paper, senior members of our multi-asset team and quantitative research group propose a robust framework for an industrialised implementation of asset allocation strategy tailored to meet the requirements of individual portfolios.
The robust framework proposed consists of three steps:
- A unique unconstrained tactical portfolio is created by relating the conviction in each view to the allocation of risk budget to the assets underlying the view.
- The tailored portfolios with investor-specific constraints and targets are constructed using robust portfolio optimisation based on implied active returns derived from the unique unconstrained tactical portfolio. The implied returns are derived from reverse optimisation using the same robust approach. Robust optimisation is the core engine for the industrialisation process. It produces portfolios consistent with the views while complying with constraints without requiring human intervention.
Finally, a factor-based risk model endows the framework with transparency by allowing for the comparison of risk-factor exposures in portfolios with the original views’ exposures.
Read the paper by Tarek Issaoui, Olivier Retiere, Romain Perchet, Francois Soupe and Chenyang Yin
