Backdrop of a different process

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Most asset allocation models are similar and consist of primarily relative return asset classes, therefore they tend to be highly correlated to each other and follow a benchmark. These portfolios normally are highly concentrated in equity and equity-like risk assets coupled with fixed income.  World markets are more correlated than ever before as global central banks have inflated their balance sheets resulting in excessive liquidity driving asset values to expand. This has diluted the efforts of traditional asset allocation by reducing diversification.  This lack of diversification has caused asset classes to become highly correlated during periods of economic stress and periods of euphoria. 

 

We believe a portfolio that is less focused on relative returns and more focused on absolute returns can achieve a more efficient portfolio with higher returns per unit of risk taken. Quality absolute return streams have the ability to have a higher return with lower volatility and lower correlation if constructing the proper investment methodology. However, just blindly allocating to absolute returns alone will not create a more efficient portfolio.

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Our Process

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When designing our models, the initial step in our process is to start with an analysis of risk management, not return, at the portfolio level. We do this by quantitatively testing our models with an emphasis on daily P/L volatility and drawdown risk characteristics. 

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Once each strategy meets our risk management requirements we run a cross asset and cross strategy analysis of correlation characteristics of each asset or strategy and determine if they add value in the overall portfolio mean variance optimization. 

 

Based upon this quantitative analysis, our models tend to be flexible, dynamic and robust in both current and future market conditions. 

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Back to All Weather Models

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