Faculty of Economics and Business Administration Publications Database

Total Return Strategies for Multi-Asset Portfolios: Dynamically Managing Portfolio Risk

Herold, Ulf
Stamos, Michael Z.
Vo, Huy Thanh
Volume: 33
Number: 2
Pages: 60 - 76
Month: Winter
ISSN-Print: 0095-4918
Link External Source: Online Version
Year: 2007
Abstract: Traditional balanced funds with a more or less constant stock allocation cannot solve the conflict of the varying investment horizons most institutional investors face. To generate capital gains, the investor must accept large allocations in risky asset classes like equities, which is often difficult to reconcile with short-term requirements such as avoiding annual losses. One way around this problem is a risk-based total return strategy that explicitly controls for shortfall risk and at the same time uses the available risk budget effectively to enhance performance potential in the long run. Because such a strategy allows for greater shifts in asset class weights over time, it can start with larger allocations to stocks or other risky asset classes than static strategies. An extensive simulation study comparing this risk-based strategy to several dynamic asset allocation approaches in a backtest quantifies its short-run hedging effectiveness and long-run hedging costs.