Dynamic Multiple Portfolio Gain Insurance Strategy

I have recently developed a principal protection strategy called "Dynamic Multiple Portfolio Gain Insurance".

Compared to the traditional CPPI (Constant Proportion Portfolio Insurance) strategy, it has two features: dynamic multiple and gain protection.

Unlike the CPPI which normally sets the multiple fix at the beginning of the portfolio investing, the DMPGI set the multiple within a range of possible vlaues, conditional on the downside risk of the risky asset. Therefore, it recognizes the essential fact that the risk of the risky underlying asset changes according to market evolutions.

It is also different from the CPPI as the protection level is not based on the beginning value of the portfolio investments but the highest level of the portfolio (gains) throughout the life of the investments, which is appealing to investors who do want to participate in the upside potentials to some extents and do want to lock in those gains.

The following example is based on the S&P/TSX 60 Index and is carried out in the Matlab application.

The fund selection sting: What criteria?

Many studies deal with the sustainability of performance, but few with their determinants. Which qualitative or quantitative factors, we should leave as long-suffering in the Institutional fund selection?

To address the above question, I establish robust results by comparing the performance of different fund portfolios formed based upon objective fund qualitative and quantitative fund performance factors, providing an economically meaningful measure of the magnitude of the relation between performance and attributes. The article has been recently quoted by the magazine of Institutional Money in Germany.

http://www.institutional-money.com/cms/magazin/uebersicht/artikel/die-fondsauswahl-welche-kriterien-stechen/?tx_ttnews[backPid]=15&cHash=9dea4ae647

Is diversification dead? A new look at asset allocation

I recently wrote an artitle on multi-asset investing for Professional Wealth Management magazine which is part of the Financial Times Group.

Basically, the perfect storm of the financial crisis nullified the supposed diversification benefits of multi-asset class strategies, but it is argued that for a range of innovative featues, they can provide investors with a more efficient and effective diversification strategy.

For more details, please refer to the following web link.

http://www.pwmnet.com/news/get_file.php3/id/297/file/p23+pwm.pdf

"Honey, I Shrunk the Portfolio Concentration Risk!"

The 2008 crisis was unique in terms of its speed, the jump in correlations and the fall in liquidity. Multiple asset-class returns have been headed in the same direction: down!

The dramatic downturn in 2008 severely shook the confidence of investors in the ability of traditional risk management practices to mitigate their downside exposure. Traditional portfolio optimization with asset weights constraints might not generate truly risk-diversified portfolio. The resulting optimal portfolios tend to be overly concentrated in a very limited subset of the full assets or securities spectrum. For example, traditional 60/40 (i.e., S&P 500 and Lehman Aggregate) or so-called balanced portfolios do not offer investors true diversification because the 60% stock allocation (S&P 500) actually accounts for almost 95% of the portfolio risk. In a sense, 60/40 portfolios put almost all the “eggs” in one basket. When (not if) the stock market has a severe downturn (as witnessed recently), 60/40 portfolios would also suffer tremendous losses.

A direct relationship exists between loss contribution to a portfolio from its underlying components, and their risk contribution counterparts. The risk contribution of component i is the share of total risk of the portfolio which is attributable to this component.

I propose a simple way to measure the homogeneity of risk contributions, which is related to the efficiency of the portfolio risk diversification. The risk diversification efficiency measure guarantees that the risk contribution weights are not too widespread. It works with negative risk contributions which are typical with bonds in a traditional portfolio, due to the negative correlations with stocks or alternative assets. The lower the value of the risk diversification measure, the more efficient the risk diversification of the portfolio.

An Innovative ETFs Solution based on Core- Satellite Framework

I recently implement a core/satellite approach to combine “core”, or diversifying asset class investments, with “satellites” that seek outperformance, aiming to create a dynamic balance between a strong foundation based on diversified asset allocation and opportunities for risk-controlled, enhanced performance.

Core/Satellite delivers the best of both worlds. Passive core investments gives the investor a low cost , tax effective and diversified portfolio, while active satellite exposures gives potential for enhanced returns. The core component of the portfolio is attuned to the investor’s long-term strategic aims, comprising assets that reflect the investor’s appetite for risk. The risk and return are optimally balanced in line with the investment goals of the investor. At the same time, we can implement tactical calls efficiently within the satellite component of the portfolio, which provides the opportunity to pursue shorter-term market-driven investment ideas.




The following chart shows the historical asset allocation and active risk exposures.