How To Incorporate Hedge Funds And Active Portfolio Management Into An Asset Allocation Framework
- Topics:
- Commercial Lending
- Tags:
- Allocation,
- Operational Planning,
- Hedge Fund,
- Exposure,
- Business Operations,
- Asset Management,
- Asset Allocation,
- Asset,
- Allocation Framework,
- Portfolio Management
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Overview: Hedge funds and other actively managed strategies contain two fundamental sources of risk: Systematic risk, and Active risk. The conventional asset allocation approach employed by most plan sponsors and consultants fails to integrate these two sources of risk. This can lead to the formation of inefficient portfolios. In this article, one proposes a risk allocation framework that focuses on risk exposures instead of asset class exposures. This framework consists of various steps. These are identifying market exposures for each strategy, quantify return and risk characteristics for each market exposure, combining market risk and active risk, construct the correlation matrix for risk exposures. Besides this, in order to fully appreciate the potential benefits of the risk allocation framework, it is important to consider why the conventional asset allocation approach is so widely accepted. The article concludes that the more sophisticated the investor, the greater the potential gains associated with the use of the risk allocation framework. Specifically, investors using any combination of hedge funds, active management, or derivatives may benefit the most from our proposed approach.
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Format: PDF | Size: 336KB | Date: Jun 2002 | Pages: 8
