Multi-asset risk-based strategies offer an alternative approach to portfolios construction.
Examples of multi-asset risk-based strategies include: Minimum Variance, Risk Parity, Maximum Deconcentration, Maximum Sharpe and Maximum Decorrelation. These strategies target a particular risk objective and that risk objective drives the underlying asset weightings.
We see a growing role for multi-asset risk-based strategies as more informed comparator to traditional asset-based multi-asset comparators such as a 60/40 equity/bond portfolio.
Potential application for risk-based strategies
Potential applications include:
Portfolio diversifier: Investors traditionally use hedge funds and/or absolute return strategies as diversifiers within a portfolio context owing to their differentiated risk-return characteristics. Similarly, risk-based strategies offer a systematic approach to delivering differentiated strategies for diversification purposes. More specifically, the objectives of a Max Deconcentration and Max Decorrelation are to deliver a differentiated approach (for a given opportunity set subject to parameter constraints).
Return enhancement: Risk-based strategies have the potential to enhance portfolio returns. More specifically, the objective of a Max Sharpe strategy is to deliver maximum risk-adjusted returns (for a given opportunity set subject to parameter constraints).
Risk mitigation: Risk-based strategies have the potential to mitigate portfolio risk. More specifically, a Min Variance strategy is optimised to deliver a risk-return characteristic close to the theoretical Minimum Variance Portfolio (for a given opportunity set subject to parameter constraints).
Benchmarking purposes: Using risk-based strategies as comparators to Hedge Funds, Diversified Growth Funds and Target Absolute Return Funds provides additional performance insight without the problems that are inherent in peer group type measures.
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ETF Investment Strategy