Investment Management - Asset Allocation, Portfolio Construction and Risk Budgeting

2 days
Prague, NH Hotel Prague
  • The “New Normal” - the Changed Investment Assumptions
  • Behavioral Finance and Investment Decision Making
  • Global Asset Classes and their Risk-return Characteristics
  • Formulation and Implementing an Investment Policy
  • Strategic and Dynamic Asset Allocation
  • Low-Volatility Investing
  • Risk Budgeting and Portable Alpha
  • Liability Driven Investing
  • Using Derivatives in Investment Management
The purpose of this seminar is to give you a good and practical understanding of the state-of-the-art methods and tools for managing investment portfolios.

First, we discuss the challenges that face investors and investment managers in the aftermath of the global financial crisis. We discuss how these challenges can be taken into account when formulating investment objectives, policies and benchmarks. We also discuss the increasing impact of "behavioral" (non-rational) considerations in investment decision making, and we explain how this may lead markets becoming increasingly non-efficient, in violation of many of the assumptions behind "modern" portfolio theory.

We then take a closer look at the various traditional and alternative asset classes and their historical and prospective risk-return characteristics and we explain how funds can be allocated to these asset classes using a pragmatic "pyramid" approach as well as the optimization techniques suggested by modern and post-modern portfolio theories. We also explain how dynamic asset allocation strategies such as "constant mix", "constant proportion portfolio insurance", "contingent immunization" and "option-based portfolio insurance" can be implemented to obtain the optimal risk-return profile, or to manage surplus risk, under various market conditions.

Further, we explain how an alternative low-volatility investing strategy can be designed and implemented and how this strategy may lead to the achievement of market returns with lower risk. We also we explain how to manage "surplus risk" and how the increasingly popular "Risk Budgeting" technique can be used to allocate "risk units" to optimize the risk-adjusted returns across managers and asset classes.

Finally, we explain and demonstrate how derivatives can be effectively used in managing investment portfolios. Examples include synthetic investing with futures, hedging of duration risk, tactical asset allocation, "insurance" strategies with options and "overlay" strategies with swaps.

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 The Investment Management Process

  • The “New Normal” - Challenges in the Aftermath of the Crisis
  • Behavioral Finance and Investment Decisions
  • Formulating Risk and Return Objectives
  • Identifying Investment Constraints
  • The Investment Policy Statement
  • Choice of Benchmark

Global Asset Classes and their Risk-Return Characteristics

  • Equity markets
  • Fixed income
  • Emerging markets
  • Real Estate
  • Commodities
  • Funds and Trusts
    • Unit Trusts
    • Exchange-Trade Funds (ETFs)
    • Hedge Funds
  • Derivatives Structured Products
  • Historical Returns of Different Asset Classes
  • Discussion: Expected Future Performance

12.00 - 13.00 Lunch

13.00 - 16.30 Strategic Asset Allocation and Portfolio Construction

  • The Importance of Strategic AA for Investment Performance
  • ”Classic” Mean/Variance Optimization
  • Shortfall-optimization
  • Dealing with the Problems in the Classic Optimization Approach
    • Time-varying volatility
    • Illiquid investments
    • Life cycle investing
  • Bayesian Analysis and Portfolio Choice
  • Resampling the Efficient Frontier
  • Scenario Optimization
  • The Black-Litterman Asset Allocation Model
  • Integrating Traditional and Behavioral Finance
    • Goals-based investing
    • Constructing portfolios as layered pyramids
  • Dynamic Asset Allocation (Rebalancing) Strategies
  • Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Low-Volatility Investing

  • The Volatility Effect and Its Possible Explanations
    • Leverage restrictions
    • Inefficient two-step investment process
    • Behavioral biases of private investors
  • Low Risk Stocks As a Separate Asset Class
  • Case study: How A Simple Investment Strategy Can Create a Market Return with Lower Risk

Risk Budgeting, Surplus Risk Management and Liability Driven Investing

  • Risk Allocation vs. Asset Allocation
  • The Concept of “Portable Alpha”
  • Constructing Optimal Portfolios under Risk Budgeting Constraints
    • Maximizing the Information Ratio
    • Shortfall Risk Optimization
  • Surplus Risk Management
    • Defining the surplus in an ALM framework
    • Managing “Surplus-at-Risk”
  • Liability Driven Investing (LDI)
    • Using overlays to match duration of liabilities
  • Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Using Derivatives for Asset Management

  • Derivatives and their Usefulness in Asset Management
  • Portfolio Management with Financial Futures
    • Minimizing cash drag through synthetic indexation strategies
    • Exploiting pricing inefficiencies in the cash/futures relationship
    • Duration management with futures and swaps
    • “Tactical allocation” with futures
    • “Sector-switching” with futures
  • Portfolio Management with Options
    • Securing minimum portfolio value
    • Enhancing portfolio return/reducing risk through covered call strategies
    • Management of shortfall-risk
  • Using Swaps and “Structured Products”
  • Using Derivatives to Create “Overlays” and “Absolute Return” Investments
  • Exercises

Evaluation and Termination of the Seminar

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