Quantitative Portfolio Construction Methodology - Optimal Allocation Across Alternative Investment Strategies In A Dynamic Framework

Optimal Allocation Across Alternative Investment Strategies In A Dynamic Framework

Introduction:

The success of Alternative Investments is attributable to both their higher level of expected return per unit of risk than traditional investments, as well as to the portfolio diversification benefits they provide. The benefits of such lightly constrained strategies can further be put to profit by enhancing the investment process in two ways; firstly by employing robust portfolio optimization techniques while including multiple risk criteria (Value at Risk, Extreme Value Theory…) so as to account for the non-linear features of both Alternative Investments returns and investors utility functions, secondly by integrating the views of Alternative Investment managers' to the portfolio construction process. The following document introduces a structure that allows Alternative Investment managers to account for both, investors' and strategies' asymmetric nature. Additionally, this document outlines an approach that allows for the proper apportioning of managers' views to predetermined neutral benchmark weights, and a framework to derive those views in a sound, consistent and tractable manner.

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