Multi-asset risk-based strategies offer an alternative approach to portfolios construction.
Examples of multi-asset risk-based strategies include: Minimum Variance, Risk Parity, Maximum Deconcentration, Maximum Sharpe and Maximum Decorrelation. These strategies target a particular risk objective and that risk objective drives the underlying asset weightings.
We see a growing role for multi-asset risk-based strategies as more informed comparator to traditional asset-based multi-asset comparators such as a 60/40 equity/bond portfolio.
Potential application for risk-based strategies
Potential applications include:
Portfolio diversifier: Investors traditionally use hedge funds and/or absolute return strategies as diversifiers within a portfolio context owing to their differentiated risk-return characteristics. Similarly, risk-based strategies offer a systematic approach to delivering differentiated strategies for diversification purposes. More specifically, the objectives of a Max Deconcentration and Max Decorrelation are to deliver a differentiated approach (for a given opportunity set subject to parameter constraints).
Return enhancement: Risk-based strategies have the potential to enhance portfolio returns. More specifically, the objective of a Max Sharpe strategy is to deliver maximum risk-adjusted returns (for a given opportunity set subject to parameter constraints).
Risk mitigation: Risk-based strategies have the potential to mitigate portfolio risk. More specifically, a Min Variance strategy is optimised to deliver a risk-return characteristic close to the theoretical Minimum Variance Portfolio (for a given opportunity set subject to parameter constraints).
Benchmarking purposes: Using risk-based strategies as comparators to Hedge Funds, Diversified Growth Funds and Target Absolute Return Funds provides additional performance insight without the problems that are inherent in peer group type measures.
Get the full report