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Nerina Visser - Portfolio construction using alpha-beta separated

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					                                                                                  March 2009




                   Portfolio construction using alpha-beta separated strategies

                                                   Presentation to the Risk SA 2009 Conference




Nerina Visser   nvisser@nedsec.co.za
Roadmap

•   Alpha and Beta in a traditional separated portfolio

•   The introduction of liability-driven investing (LDI) into the equation

•   What constitutes beta and how to get it

•   The evolution of indexing

•   Introducing alternative investment vehicles
     –   including the use of ETFs


•   Where are the risks?

•   Conclusion




                                              2
Alpha and Beta in a traditional
separated portfolio



               EXPOSURE                              SKILL




     •   Must have!                   •   Voluntary – can only be justified
                                          if found
     •   Broad
                                      •   Flexible
     •   Diversified
                                      •   Broad
     •   Low cost
                                      •   “Elastic” – easy to add or delete
     •   Funding base for alpha           risk sources

                                  3
α is for performance…

•   The fundamental / generalised law of active management
     –   IR = IC x √N x TC         (= α ÷ TE)
     –   Information Ratio = Information Coefficient x Breadth x Transfer Coefficient
     –   Value add = Manager skill x # of independent bets x Effectiveness of view transfer

•   Stock selection ICs ≈ 0.02, compared to Country and Sector selection ICs ≈ 0.10
     –   Thus, the “signal-to-noise” ratio for strategic decisions is five time higher than for stock
         decisions
     –   Differences in motivation and cognitive biases between bottom-up and top-down
           •   Source: Barings Asset Management


•   Portable alpha hurdles
     –   Alpha is not always scalable, and there is no guarantee
     –   Cost and tracking error of derivatives
     –   Cost of pure alpha – includes funding cost for shorting
     –   Correlation to benchmark (beta pollution) could affect quality of alpha




                                                    4
… β is for (low) cost

•   The notion of passive management is counterintuitive to many investors

•   The rationale behind indexing stems from four concepts of financial economics:
     –   The law of averages: in the long term, the average investor will have an average (before-
         costs) performance equal to the market average. The average investor will benefit more
         from reducing investment costs than from trying to beat the average

     –   The efficient market hypothesis postulates that equilibrium market prices fully reflect all
         available information. Although controversial and hotly debated, it is widely interpreted as
         suggesting that it is impossible to systematically "beat the market" through active
         management

     –   The capital asset pricing model (CAPM) imply that, in equilibrium, all investors will hold a
         mixture of the market portfolio and cash, the risk-free asset. From this follows that the only
         fund investors need is a market index fund

     –   The principal-agent problem: an investor (the principal) who allocates money to a portfolio
         manager (the agent) must properly give incentives to the manager to run the portfolio in
         accordance with the investor's risk/return appetite, and must monitor the manager's
         performance

                      "Don't just do something, sit there!"
                                                   5
Effective use of the tracking error /
risk budget

•   Allowable tracking error (or risk budget) for portfolio: 5%
•   75% Passive (beta), 0% tracking error, very low cost
•   25% Active, 20% tracking error, pay active management fees
•   Achieve allowable 5% tracking error at much lower cost




    75% - Passive
    75% - Passive      +   25% -- Active
                           25% Active      =    Same TE but lower cost




       TE = 0%
       TE = 0%               TE = 20%
                             TE = 20%




                                           6
The introduction of Liability-Driven
Investing (LDI) into the equation



                                •   Implementation of LDI attempts to deal with
            LDI                     targeted return investing

                                •   Alpha and Beta now need to be combined
                                    in a growth portfolio where absolute return
                                    is the objective

                                •   Relative size and importance of the
                                    components will depend on
                                     –   Return requirement
                                     –   Risk tolerance
      β             α                –   Governance / regulation
                                     –   “Houseview” / Beliefs
                                     –   Markets
                                     –   Etc.




                            7
The problem of “beta squeeze”


                 LDI Puzzle       Alpha Thrill


                              b
                              e
                              t
                              a


                              8
What constitutes beta
 – traditionally

•   The default implementation of (equity) beta starts with market cap weighted indices
     –   These give a picture of the investment opportunities in every market, but are not
         necessary optimal
•   Significant concentration of risk
     –   Equity dominated portfolios
     –   Market cap dominated equity benchmarks
     –   Concentration of timing – futures close-out, index rebalancing
     –   Single calculation methodology

                  Exaggerated price movements for non-fundamental / structural reasons


•   Better long term value could be created by deviating from the market benchmark
     –   Enhanced indexation presents a low risk alternative
     –   Alternative weighting schemes: capped, equally weighted, fundamental or wealth indices
     –   Diversification within beta…
•   Since there is less focus on active, long-only management in an alpha-beta
    separated world, it is easier to be flexible and non-conventional in the beta portfolio



                                                  9
 Portfolio construction
 – a new paradigm


                                           •   Overlays (currency,
                                               TAA etc.)
Diversified alpha sources                  •   Equity alpha (market
                                               neutral)
                                           •   Bond alpha
                                           •   Hedge funds
 Diversified beta sources
                                           •   Equities
                                           •   Bonds
                                           •   Property
             Liability hedge               •   Other assets

                                           •   Bespoke bond
                                               portfolios
                    Liabilities            •   Interest rate swaps
                                           •   Inflation swaps
                                           •   Pooled swap funds



  Source: Barclays Global Investors

                                      10
A new line of separation between
Alpha and Beta




       What to own                 What to trade



                         11
The components of traditional
building blocks…

                 Domestic asset return decomposition 1966-2008
                         25



                         20
 Annualised return (%)




                         15



                         10



                         5



                         0
                                                  Cash                                           Bonds                    Equities

                                 Inflation                                       Interest rates               Bond risk premium (rel. to cash)
                                 Income (dividends)                              Growth (Real EPS)            Equity risk premium (rel. to bonds)

                              Median values of 12m total returns and levels of inflation and interest rates

                                                                                             12
… are insufficient to meet
absolute (real) return targets!
120                                                                                                                                                            120
110                                                                                                                                                            110
100
 90
             Cash                                                                                                                                              100
                                                                                                                                                                90
                                                                                                                                                                             Bonds
 80                                                                                                                                                             80
 70                                                                                                                                                             70
 60                                                                                                                                                             60
 50                                                                                                                                                             50
 40                                                                                                                                                             40
 30                                                                                                                                                             30
 20                                                                                                                                                             20
 10                                                                                                                                                             10
  0                                                                                                                                                              0
-10                                                                                                                                                            -10
-20                                                                                                                                                            -20
-30                                                                                                                                                            -30
-40                                                                                                                                                            -40
-50                                                                                                                                                            -50
             1969
                    1971
                           1973


                                         1977
                                                1979
                                                       1981


                                                                     1985
                                                                            1987
                                                                                   1989
                                                                                           1991


                                                                                                         1995
                                                                                                                1997
                                                                                                                       1999


                                                                                                                                     2003
                                                                                                                                            2005
                                                                                                                                                   2007




                                                                                                                                                                             1969
                                                                                                                                                                                    1971
                                                                                                                                                                                           1973


                                                                                                                                                                                                         1977
                                                                                                                                                                                                                1979
                                                                                                                                                                                                                       1981


                                                                                                                                                                                                                                        1985
                                                                                                                                                                                                                                                1987
                                                                                                                                                                                                                                                        1989
                                                                                                                                                                                                                                                                1991


                                                                                                                                                                                                                                                                                1995
                                                                                                                                                                                                                                                                                        1997
                                                                                                                                                                                                                                                                                                1999


                                                                                                                                                                                                                                                                                                                2003
                                                                                                                                                                                                                                                                                                                        2005
                                                                                                                                                                                                                                                                                                                               2007
      1967




                                  1975




                                                              1983




                                                                                                  1993




                                                                                                                              2001




                                                                                                                                                                      1967




                                                                                                                                                                                                  1975




                                                                                                                                                                                                                                1983




                                                                                                                                                                                                                                                                        1993




                                                                                                                                                                                                                                                                                                        2001
                                                                     Cash            Inflation                                                                                                                                         Bonds                  Inflation

120                                                                                                                                                            40
110
100          Equities                                                                                                                                          35          Balanced
 90
 80                                                                                                                                                            30
                                                                                                                                                                           (60-30-10)
                                                                                                                                                                                                                                                                                                                                      .
 70
 60                                                                                                                                                            25
 50
 40                                                                                                                                                            20
 30                                                                                                                                                            15
 20
 10
  0
-10
                                                                                                                                                               10

                                                                                                                                                                5
                                                                                                                                                                                                                                                                                                                                      ?
-20
-30                                                                                                                                                             0
-40
-50                                                                                                                                                            -5
                                                                                                                                                                                                                                                                                                                                      .
             1969
                    1971
                           1973


                                         1977
                                                1979
                                                       1981


                                                                     1985
                                                                            1987
                                                                                   1989
                                                                                           1991


                                                                                                         1995
                                                                                                                1997
                                                                                                                       1999


                                                                                                                                     2003
                                                                                                                                            2005
                                                                                                                                                   2007




                                                                                                                                                                    1967
                                                                                                                                                                           1969
                                                                                                                                                                                  1971
                                                                                                                                                                                         1973
                                                                                                                                                                                                1975
                                                                                                                                                                                                       1977
                                                                                                                                                                                                              1979
                                                                                                                                                                                                                     1981
                                                                                                                                                                                                                              1983




                                                                                                                                                                                                                                                       1989
                                                                                                                                                                                                                                                               1991
                                                                                                                                                                                                                                                                       1993
                                                                                                                                                                                                                                                                               1995
                                                                                                                                                                                                                                                                                       1997
                                                                                                                                                                                                                                                                                               1999
                                                                                                                                                                                                                                                                                                       2001
                                                                                                                                                                                                                                                                                                               2003
                                                                                                                                                                                                                                                                                                                       2005
      1967




                                  1975




                                                              1983




                                                                                                  1993




                                                                                                                              2001




                                                                                                                                                                                                                                       1985
                                                                                                                                                                                                                                               1987




                                                                                                                                                                                                                                                                                                                               2007
                                                                 Equities                 Inflation                                                                                      CPI+7            CPI+5                CPI+3                  3yr Ave CPI                     3yr Ave Balanced

Median values of 12m total returns and levels of inflation and interest rates
                                                                                                                                                          13
Introducing beta diversification

•   Market beta (benchmark / stock exchange indices)
     –   Global, Regional and Emerging market ETFs
     –   MSCI – Global Investable Market Indices (adding Mid&Small Cap to MSCI-SA)
•   Timed beta (asset allocation – country / sector / asset class basis)
     –   Sector ETFs, including global, regional and single country sector exposure
•   Tilted beta (growth vs. value style)
•   Themed beta (socially responsible, environment, etc.)
     –   Alternative asset classes – Private equity, Infrastructure, Unlisted Property, Energy,
         Carbon Emissions
     –   Shari’ah-compliant Indices
•   Variety in methodology (capped, weighting, # of constituents)
•   Fundamental (dividends, cash flows)
     –   RAFI (Fundamental indexing)
     –   NewSA – shares weighted according to BEE compliancy scores
•   Custom / exotic beta (quantitative models, derivatives, geared products)
     –   Custom baskets – Z-shares RandHedge and RandPlay
     –   Inverse / Leveraged ETFs – up to 200% positive gearing and 2x short (reverse)
         performance
     –   Swap-based and Short ETFs

                                                 14
Enhancing the alpha-beta
separated portfolio


•   Beta – diversification of the core                                   α – Overlay
     –   Equities & fixed interest only                                   Satellites
     –   Strategic asset allocation
     –   Allocate to different types of indices
                                                                          β – Core
                                                                        Equities & Fixed
                                                        Tactical
•   Alpha – satellite overlays                            asset
                                                                          Interest only          Structured
     –   Tactical asset allocation                                                                products
                                                       allocation   Strategic asset allocation
     –   Exposure to alternative asset classes
     –   Structured products                                           Use different types
                                                                           of indices


                                                                           Exposure to
                                                                        alternative asset
           But can Alpha satellites also                                     classes
           be implemented as Beta?


                                                  15
Introducing alpheta

•   The focus in enhancing beta is on “better betas” or in using betas in an active strategy
     –   this pretends that the betas are really alphas
•   Greater value is to be had from turning alpha into beta (“alchemy in reverse”) – this
    can be achieved by
     –   programming the inputs into successful strategies
     –   parameterising, and hence the indexing of an investment strategy
•   Alpha, by its very nature, is scarce, fragile and risky. Beta is becoming increasingly
    subjective. Alpheta aims to combine these two into something that maximises the
    opportunity / cost ratio
•   Alpha supposedly measures manager skill, but this is hard to verify. To measure the
    significance of skill takes many years worth of data to confirm
•   Simulation models have the ability to replicate theoretical portfolios based on the
    manager’s normal universe of stocks and portfolio construction rules
     –   this assists in estimating skill vs. luck
•   Alpheta comes in many guises:
     –   Commoditised fundamental / macro-driver funds
     –   Synthetic hedge fund replication
     –   Risk managed / derivative assisted products


                                                     16
The “BettaBeta” paradigm


•   A balanced view of LDI + α + β
    equation requires
      –   A wider definition of β
      –   A re-appraisal of α in the light
          of the new β’s                                                 Custom   β
                                                                       Rules-based
                                                                    Client “house view”

•   Three categories of beta
                                                                    investment process
                                                                   Custom indices & CISs
      –   Vanilla β                                                Motivation: Efficiency
      –   Smart β




                                                                        β
      –   Custom β


•   Solution – active and diversified                                   Diversified β
    passive allocation!
                                                    Vanilla   β                               Smart   β
                                                 Published indices                         Published indices
•   But wait – what about the                       Existing ETFs
                                              i.e. ALSI, SWIX, ALBI,
                                                                                             Existing ETFs
                                                                                         i.e. Divi+, RAFI, etc.
    required underlying indices                      Satrix, etc.                     AND Custom indices & CISs
                                              Motivation: Cost saving               Motivation: Liability matching




                                             17
The evolution of indexing

As the design and application of indices evolve, the introduction of new indexation
concepts creates new investment opportunities and choice

                                              A means of defining a strategy                   Blurring the distinction
                                              for generating alpha                             between active and
                                                                                               passive investing


                                Tools for assessing market                     Indices now cover all asset
                                risk, diversification benefits                 classes, from real estate to
                                                                               art

                      Underlying component                   From passive tracker funds,
                      of financial products                  structured products & derivatives to
                                                             ETFs

             Tool for
             benchmarking        Performance analysis for active managers



 Economic
 indicator
                                                                       The evolution of indexing over time


                                                        18
The challenge – providing a clear,
concise & transparent methodology

A good index needs to be:
• Representative of the underlying market that it seeks to reflect
• At the same time, it needs to reflect the investable universe
     –   i.e. there is a liquid component necessary for arbitrage and hedging transactions in the
         underlying markets
     –   in our market we are familiar with the concept of “free float”
•   Easily understood and easy to anticipate – investors require a predictable, rules-
    driven structure
•   Independent – ideally, a committee should oversee the management of the index
•   Low turnover
     –   To reduce the transaction costs of portfolio rebalancing
     –   “Buffer zones” at review time are a popular concept to reduce constituent turnover volatility


    Indices in less developed markets need to include features which are familiar to
    investors running international portfolios to facilitate foreign portfolio flows




                                                 19
Latest developments in international
regulations

•   UCITS III – Undertakings for Collective Investment in Transferable Securities

•   In SA we have CISCA – Collective Investment Schemes
     –   It governs unit trusts, mutual / index funds, CISs, ETFs, etc.


•   EAD – Eligible Assets Directive (2007/16/EC)
     –   Provided clarification of certain definitions
           •   Financial Indices
           •   Index replicating UCITS


•   Impact of UCITS III and EAD on indices and index providers
     –   Review existing indices
     –   Evaluate new / proposed indices (eg. commodity, property and hedge funds indices)
         to ensure adherence to requirements for
           •   Diversification
           •   Correlation
           •   Weighting



                                                   20
Introducing alternative investment
vehicles

•   Exchange Traded Funds (ETFs)

•   Fixed Income ETFs

•   Tactical allocation thematics

•   Shari’ah complaint / Socially responsible indices

•   Commodity indices, ETFs and ETCs

•   Tailor made indices / personalised funds
     Examples
     – Low beta strategies
     – Substantial value strategies




                                           21
The use of Exchange Traded
Funds (ETFs)

South African ETF Market – 10 years of development


                                             2000     2009

Assets under management                     R2.4bn   R17.5bn

Turnover (p.m.)                             R67.6m   R2.3bn

No. of funds                                   1       21

No. of ETF providers                           1       7

No. of exchanges                               1       2

Asset classes                                  1       5




                                             22
Fixed Income ETFs

                  Advantages of Fixed Income ETFs
Vs. Futures         •   No management of the rolls or maturities
                    •   No margin requirements and margin calls follow up
                    •   Diversification: not a single cheapest-to-deliver but
                        a list of underlying bonds of the index
                    •   No short squeeze factor that could be due to the
                        cheapest-to-deliver

Vs. Bond            •   Traded on real time on the exchange: subscription
Funds                   or redemption at known price at any time during the
                        trading session
                    •   Possibility to sell short the ETF
                    •   Possibility to get additional return by lending the
                        ETF

Vs. Direct          •   No management of the coupons
Lines               •   Administrative follow up is handled by the the ETF
                        manager
                    •   One single line for an exposure of a basket of
                        bonds


Source: EasyETF

                                                            23
Tactical thematic allocations

•       EasyETF FTSE ET50 Environment
                                                                    300
                      Waste                     Solar                                       MSCI World
                      21%                      Energy                                       FTSE ET50
                                                31%                 250


                                                                    200

         Efficiency                                                 150
            10%

                                                                    100

                 Water
                                               Wind                 50
                 13%
                                              Energy




                                                                                   Jul-04




                                                                                                                        Jul-05




                                                                                                                                                                 Jul-06




                                                                                                                                                                                                             Jul-07




                                                                                                                                                                                                                                                             Jul-08
                         Geothermal




                                                                                                     Jan-05




                                                                                                                                            Jan-06




                                                                                                                                                                                       Jan-07




                                                                                                                                                                                                                                     Jan-08




                                                                                                                                                                                                                                                                                      Jan-09
                                                                          Apr-04



                                                                                            Oct-04



                                                                                                              Apr-05



                                                                                                                                  Oct-05



                                                                                                                                                      Apr-06



                                                                                                                                                                            Oct-06



                                                                                                                                                                                                  Apr-07



                                                                                                                                                                                                                         Oct-07



                                                                                                                                                                                                                                                 Apr-08



                                                                                                                                                                                                                                                                         Oct-08
                          Energy               24%
                            1%

•       EasyETF S-BOX BNP Paribas Global Agribusiness
                                          Machinery                 350
                                            21%                                                  MSCI World
                                                                    300                          BNP Paribas Global Agribusiness

          Chemicals
                                                                    250
            37%

                                                                    200
                                                          Non
                                                       alimentary
                                                                    150
                                                       producers
                                                          20%
                                                                    100

                                                                    50
                                                                                   Jul-04




                                                                                                                       Jul-05




                                                                                                                                                               Jul-06




                                                                                                                                                                                                           Jul-07




                                                                                                                                                                                                                                                          Jul-08
                                                                                                     Jan-05




                                                                                                                                           Jan-06




                                                                                                                                                                                     Jan-07




                                                                                                                                                                                                                                  Jan-08




                                                                                                                                                                                                                                                                                  Jan-09
                                                                          Apr-04



                                                                                            Oct-04



                                                                                                              Apr-05



                                                                                                                                 Oct-05



                                                                                                                                                     Apr-06



                                                                                                                                                                          Oct-06



                                                                                                                                                                                                Apr-07



                                                                                                                                                                                                                      Oct-07



                                                                                                                                                                                                                                              Apr-08



                                                                                                                                                                                                                                                                      Oct-08
                                Food
                              producers
                                 22%

    Source: EasyETF, Bloombergs                                                             24
Socially responsible /
Shari’ah compliant indices
•   Qualitative screening – business activity
     –   no alcohol, pork, conventional finance, weapons (arms & defense), entertainment (casinos, gambling,
         pornography)
•   Quantitative screening – financial ratios
     –   certain financial ratios < 33%, cash & accounts receivable < 50% of assets, income from non-compliant
         activities < 5%, purification of dividends at 5%

                    FTSE/JSE Top40 Index                               FTSE/JSE Shari’ah Top40 Index

                                                                                      Financials
                                       Oil & Gas                         Telecommu               Oil & Gas
                                                                                         1%
                                           8%                              nication                 12%
            Financials
                                                                             13%
               17%
                                                                   Consumer
                                                                     Goods
    Telecommu                                                         6%
      nication                                                  Industrials
        9%                                                          1%


    Consumer
     Services
                                                    Basic
       4%
                                                   Materials
                                                    46%
         Consumer
          Goods
           13%                                                                                          Basic
                         Industrials                                                                   Materials
                            3%                                                                          67%

                                                           25
The pros and cons of commodity
indices, ETFs and ETCs

•   The Pros
     –   Invest in market without the necessity of taking physical delivery
     –   Undated, easy and economic access to commodities market
     –   Can be bought on margin and sold short
     –   No margin, no rolling required
     –   At least as liquid as the underlying
     –   Multiple Authorised Participants and Market Makers (internationally)
     –   Multiple exchanges and currencies, eg. USD, EUR, GBP (internationally)
     –   UCITS compliant (ETFs) or UCITS eligible (ETCs)


•   The Cons
     –   ETF could potentially trade above or below the value of the underlying portfolio
     –   Counterparty risk, limited to a maximum of 10% of the fund’s NAV, for ETFs
     –   Potential counterparty risk, in the case of ETCs backed by futures contracts
         (counterparties have an “AA” rating)
     –   Limited availability in SA




                                                 26
Tailor-made indices /
personalised funds

Where did these originate?
• Strategy ideas and custom investment styles were difficult to be replicated by
  private clients
     –   Consistently
     –   Continuously
     –   In a disciplined manner
     –   For various markets / sectors


Goal
• Create certificates / products that replicate the proposed investment strategy and
   make it available to private and institutional clients

•   Use the efficient structures and tax / cost advantages created by indexation and
    collective investment schemes




                                           27
Examples of custom β

Beta-Blocker Strategy
• “Hot stocks” often have a high beta – a measure of the sensitivity to overall market
   movements; But this is based on historical above-market sensitivity, i.e. these
   stocks were highly geared to past market performance
• Latest research has shown that for the US equity market from 1996 until 2005, low
   beta portfolio would have substantially outperformed high beta portfolios
• Calculate the 5-year beta of all the stocks in the index
• Pick the stocks with the lowest beta and hold them for six months
• Recalculate the betas after six months and adjust your holdings

Substantial Value Strategy
• Strong empirical evidence for superiority of fundamentally-weighted indices over
   capitalisation-weighted indices
• Book value weighted baskets delivered convincing results
• Calculate the 5-year average book values of all the stocks in the index
• Produce a book value weighted index
• Recalculate book values every six months and adjust weights accordingly
 Source: Julius Bär

                                          28
Where are the Risks?

•   We identify a number of risks in these new structures:
     –   Model risk (how sound are these new structures and their models)
     –   Liquidity (how liquid will these be as ETFs)
     –   Pricing (these “exotic” ETFs, charging 75-100 bp for a form of active management rather than
         the 10-20 bp originally charged by the earlier products; still cheaper than actual active
         management, but already quite expensive)
     –   Structural / Operational risk (documentation, transparency, etc.)

•   What are the models missing?
     –   Historical data that drive models may not reflect the current environment for asset class
         correlations, risk and return expectations
           •   Legislative (eg. accounting regulation, fiscal policy)
           •   Event-specific or Asset class specific (eg. elections or political events, technological advances)
           •   New demand drivers (eg. maturation of asset classes, institutional demand)
     –   Utilise “judgment calls” – small qualitative overrides (0-5%) to compensate for these factors
         being excluded from or being under-represented in the models

•   Proliferation of new products (ETFs) runs the risk that the “fad” overwhelms the “useful”
     –   However, one can simultaneously argue that there are both too many and too few index
         products at present


                                                        29
Heed the UCITS/EAD guidelines
for indexation…

•   Adequate benchmark for market / segment
     –   Measure the performance of the underlying components in a relevant and appropriate way
     –   Index reviewed and rebalanced periodically following criteria which are publicly available
     –   Underlying components are sufficiently liquid to enable replication
     –   Recognised methodology which generally does not result in the exclusion of a major issuer
         of the market (or defined segment) to which the index refers


•   Sufficiently diversified
     –   One component does not unduly influence the index
     –   Maximum weighting per component 20%


•   Published in an appropriate manner
     –   Sound procedures to collect prices, calculate and publish index value, including procedures
         where a market price is not available
     –   Information on index calculation, rebalancing methodologies, index changes or operational
         difficulties is provided on a wide and timely basis
     –   Accessible to the public
     –   Index provider is independent from the index-replicating product provider



                                                30
Conclusion

Five steps to a better portfolio:

1. Increased awareness of alpha and beta as separate building blocks
        - aim to separate alpha from beta where it is possible and makes sense


2. Focus on optimal implementation of beta

3. Consider inclusion of alternative assets and non-traditional beta exposures

4. Dynamic management of the beta exposure in the medium term
        - “allocation” alpha based on risk timing rather than market timing


5. Think in terms of the whole risk budget, not separate alpha and beta budgets




                                                 31
32

				
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