How does Active Asset Allocation adapt its services to the client?
We customize each of our solutions to fit with your risk constraints and investment universe. To do so, we identify the asset classes you want to invest in and the maximum risk that you are willing to take. We then design a specific solution, test it in a stochastic environment and adjust it before it is fully operational. Even once they are implemented, we upgrade our solutions on an on-going basis since our internal research keeps stepping forward.
If Active Asset Allocation advises asset allocation, what is my role as an Asset Manager?
Our solution determines on a regular basis the percentage of total assets which should be dedicated to each asset class you want to invest in. Within each asset class, you keep the control of your investments. We protect, you perform !
If rebalancing happens on a regular basis, do you monitor the fund’s performance in between?
Yes, we monitor daily all our clients’ portfolios to ensure that risk limits are not breached. We also set up “alert thresholds” which indicate that half of the risk budget has been consumed during the month. If a threshold is reached, we re-adjust the allocation with an intra-month rebalancing.
Why does Active Asset Allocation recommend monthly rebalancing?
A monthly rebalancing enables our clients to keep control of their short-term constraints (funding ratio, maximum drawdowns…) while respecting their long-term goals. Other rebalancing frequencies are also possible, but monthly rebalancing has shown to produce robust results.
If rebalancing is too frequent, won’t transaction costs negatively impact the performance?
No. Even if we recommend rebalancing on a regular basis – usually every month-, only a portion of each asset class needs to be rebalanced, and the rebalancing proves to be a good choice to protect your portfolio and to capture performance.
With its pro-cyclical nature, my portfolio might still be invested in the underperforming assets at the start of a downturn period or hardly exposed when the market bounces back…
This is true. However when the risk budget is at stake, the strategy scales back the risky assets which will allow for missing the early stage of a subsequent upturn.
We can also combine our approach with a de-risking solution: the Asset Manager chooses a goal performance, and as the portfolio gets close to it, we progressively de-risk the positions since no further risk needs to be taken.
The more volatile the risky asset, the more frequent the reallocation?
Rebalancing frequency is market independent (unless stop-loss), as parameters are time and state-variant.
You propose DARM and DALM, what is the difference between these two solutions?
DARM (Dynamic Asset & Risk Management) fits the general willingness of investors to obtain absolute returns, and it can meet the requirements of capital preservation.
The portfolio is divided into a protective “Core” and a “Satellite” which captures the performance. The model dynamically allocates capital between the Core and the Satellite, given the risk budget which is available and a multiplier m. This structure can be overlapped with other Core/Satellite structures in order to take into account sub asset-classes.
DALM (Dynamic Asset & Liability Management) is an extension of the DARM solution which allows to take into account the liabilities of the investor and therefore to protect for instances the funding ratio, to control its volatility and minimize required contributions.
The portfolio is divided into a Liability-Hedging Portfolio (LHP) and a Performance-Seeking Portfolio (PSP), organized like a DARM. This time, the model allocates capital between the two portfolios given the constraints on the funding ratio.
Where does the multiplier m come from?
The m is determined through a proprietary mathematical model which takes into account financial risks. It is computed to generate excess return while respecting portfolio constraints. The multiplier can be constant or market state-dependent. Active Asset Allocation is conducting intensive research on its computation.
Based on your models, if the floor is reached, won’t my portfolio completely move into the Core and indefinitely stick to it, like in CPPI?
No, in a DARM if the floor is reached, the fund will fully move into the Core. But even if the Core is protective, it is able to generate a positive return (with bonds for instance) which will replenish the risk budget to reinvest in the Satellite.
In a DALM, the fund would move into the LHP (very much like in an LDI approach); if the LHP is a perfect hedge for liabilities, new risk budget will come from new contributions; if there is some risk left in the LHP, new risk budget will come from a positive move of assets with respect to liabilities and/or from new contributions.
Do you bet on the future return of assets?
No, our model does not rely on any forecast. The allocation to the risky assets will only depend on the risk limits that we have established with the investor, and that take into account their particular needs and constraints, including regulation.
When conducting your simulations, do you also test your model in extreme market conditions?
Yes. Our simulations use a methodology called Filtered Historical Simulations. It enables us to test our models in conditions ranging from normal to extremely stressed scenarios, and it applies to different asset classes.