Asset Allocation Studies
- Over 90% of Long Term Returns are a result of Allocation Decisions
- Asset Classes Represent Pure Investment Meta-Forms that When Combined Efficiently Reduce Sigma and Increase Returns
- Markets are Cyclical, Asset Allocation Models are Cyclical Robust
Asset allocation derives from a prudent study of client's defined goals and the desired time frame to accomplish those goals. The asset classes chosen reflect these goals through our methodology.
Understanding liquidity and exposure criteria is the first step in developing an asset allocation strategy. With this information we are then able to create optimized models that reduce risk and maximize returns.
Our asset allocation approach finds its roots in Mean Variance Optimization. We model a variety of asset classes as they historically correlate in their normalized variance to achieve asset class mixes that lower variability (risk) and maximize total return (yield, dividends and absolute appreciation). We explore combinations of asset classes seeking to achieve mean returns higher than the target returns while holding the minimal risk allowable.
We monitor asset class correlations on a continual basis.
We create asset allocation models that reflect the strategy of the client, taking into account the probabilities of achieving the desired outcome with the minimum of variability.
ASC defines asset class structures as groups of investments with similar characteristics. We use generally accepted asset class definitions for traditional asset classes (large cap, mid cap, small cap, growth, value and blend) and generally accepted strategy definitions for alternative investment classes (convertible arbitrage, risk arbitrage, equity long-short, market neutral, global macro, fund-of-funds, venture capital, mezzanine, LBO, etc).
ASC develops investment objectives in conjunction with internal investment staffs and Boards in light of the explicit and implicit funding requirements, expenses and the expected inflation rate. Once a minimum return is determined, ASC evaluates several different allocations that help the client reach or exceed its minimum return goal at prudent levels of risk. Once a preliminary asset allocation target is reached, the addition of asset classes comes down to two questions:
- Does the addition of this asset class increase or reduce the portfolio's expected return? or
- Does the addition of this asset class reduce or increase the expected volatility of the portfolio assets?
ASC develops risk control policies via modeling of the expected return stream and volatility.