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Portfolio Construction, Hedging and Rebalancing

New Insights into Old Problems?

In the light of market dislocations during the first quarter, a common theme emanating from several papers is how to approach portfolio construction. During the setback and despite the subsequent market rally, measures of risk across asset classes have remained elevated.  At the same time, long-held correlations between a number of asset classes appear to have broken down, bringing into question historical assumptions about how such relationships between asset classes might behave in a future crisis.

In addition to investigating portfolio construction and asset allocation considerations, papers also address portfolio diversification techniques and hedging strategies. And after sharp moves in asset classes which lead to portfolio drift, investors often look to rebalance their portfolios in line with target asset weightings. State Street identifies some of the different approaches to portfolio rebalancing undertaken by institutions.

 

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Equity Market Stress Monitor Report: Q3 2020 (Intech)

For compliance reasons, this paper is only accessible in certain geographies

Intech’s Equity Market Stress Monitor is based on 30 years of studying market volatility data and comprises five risk metrics which they believe are reliable indicators of equity market stress.

Total Portfolio Approach: Another method of portfolio construction (SimCorp, 2020)

SimCorp argues that investors should consider the Total Portfolio Approach to portfolio construction and asset allocation, as it appears to offer more flexibility in adapting to changing circumstances than the traditional Strategic Asset Allocation method.

Investment Update: Gold, an efficient hedge (World Gold Council, Apr 2020)

For compliance reasons, this paper is only accessible in certain geographies

World Gold Council highlights the costs and complexity of various portfolio hedging strategies and argues that an allocation to gold might potentially be an attractive alternative.

Does the Illiquidity of Private Markets Affect Asset Allocation? (State Street, 2020)

State Street argues that investors should consider a different approach in how they evaluate the liquidity of an asset within a portfolio context. Doing so would enable investors to evaluate better the benefits of liquidity and costs of illiquidity, which exert influence on Strategic Asset Allocation decisions.

The Inflation-Deflation Debate: Implications for asset allocation (AllAboutAlpha blog, Jun 2020)

One of the key drivers for asset allocation changes in portfolios is the inflation outlook, as it has significant implications for both the valuation and allocations to both bonds and equities. This piece examines the inflation outlook and considers the differing approaches necessary to cope with either an inflationary or deflationary environment.

Alpha Calibration: Aligning your Portfolio Construction Process for Optimal Results (Qontigo, 2020)

Qontigo investigates the different types of alphas, a crucial tool used in in portfolio construction, and how incorrectly calculating them can lead to issues for portfolio managers.

The (Re)balancing Act: A disciplined approach to aligning assets with long-term objectives (State Street, Jun 2020)

After sharp moves in asset prices, such as those seen in the market dislocation in March, many institutions needed to rebalance portfolios as allocations drifted away from targets. State Street investigates the approach taken by different institutions.

Equity Risk Premiums (ERP): Determinants, Estimation and Implications (Damodaran, 2020)

The equity risk premium (ERP) is an integral component of many asset allocations decisions. In this paper, Professor Damodaran investigates the reasons why estimates for the ERP vary quite so much.

Risk Strategy: Roll of the dice (Aviva Investors blog, 2020)

For compliance reasons, this paper is only accessible in certain geographies

Aviva Investors investigates how even the best-laid risk assessment and mitigation strategies can come unstuck in an increasingly globalized and interconnected world, and suggest ways for building resilience.

Tail Risk Hedging: Contrasting put and trend strategies (AQR Capital Management, 2020)

AQR summarises some of their key findings on tail risk mitigation strategies with some interesting, and arguably controversial, conclusions.

Capitalising on the Mood Swings of Markets: ROOF Market Portfolios (Qontigo, Jul 2020)

Qontigo offers some insight into its market sentiment and risk appetite tools for investors, arguing that they may well be used as market timing tools to add alpha.

Portfolio Hedging With a Low-Cost, Long Volatility Strategy (Janus Henderson Investors, Mar 2020)

For compliance reasons, this paper is only accessible in the United States and Canada

Janus Henderson Investors highlight a low-cost, long volatility risk mitigation strategy that is designed to benefit from volatility shocks, but at a reasonable cost.

The Top 10 Cross-Asset Correlations to Watch (Qontigo blog Jun 2020)

One of the noteworthy events during the recent market crisis was that asset classes did not behave as was expected, with many long-held correlations and relationships breaking down. Qontigo looks at several notable asset class pairs.

Does Diversification Fail Us? (LGIM blog, 2020)

For compliance reasons, this paper is NOT accessible in the United States and Canada

LGIM notes that relationships between asset classes are not static, and that unexpected and increasing correlations between asset classes during a crisis is unhelpful, but does not make diversification unwarranted.

Webinar: Investing in Real Assets (World Gold Council, Jul 2020)

For compliance reasons, this paper is only accessible in certain geographies

World Gold Council's Head of Americas and Global ETFs joins a panel discussion in which the use of gold as a portfolio diversification instrument is discussed.