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Improving multi-asset portfolios by smarter portfolio construction

Multi-Asset funds invest in multiple asset classes (e.g. stocks and bonds) as opposed to being limited to one asset class. This brings additional challenges for the risk management of such funds. Some examples:

Risk parity
Risk parity is a popular topic and is about dividing the risk budget equally over time, between asset classes, between assets within asset classes, and/or between active investment decisions. This is different from equal money weights. For example a 50%-50% equity-bond portfolio has more than 95% equity risk. You need a 25%-75% equity-bond portfolio to get an equal risk contribution from equities and bonds.

Risk parity, however, is also a difficult topic. E.g. in 2015 until July bond volatility had been on the rise whereas equity volatility was near all-time lows. Well-known risk-parity funds such as the one from Bridgewater as a result had increased their equity holdings at the expense of the bond holdings. Yet in August equities took a big hit and so did risk-parity funds.

Hidden risks
A multi asset portfolio can also have hidden risks. E.g. on January 15, 2015, the Swiss central bank gave up the 3-year old currency peg of the Swiss Franc with the Euro. The result: A 20% appreciation of the Swiss Franc. At the same time the Swiss equity market took a large hit to the extent that for a foreign investor in Swiss equities it appeared nothing happened. Yet a multi asset portfolio shorting the Swiss Franc and overweighting Swiss equities took a double hit. Hence cross-asset correlations are an important source of risk.

Multi-Asset funds
Multi-Asset funds are growing fast. Robeco also puts in a large effort to grow in this area. Robeco already has several multi-asset funds. Through this internship we want to improve the risk management and portfolio construction of these funds beyond what we already have in place.

Research questions
First let us stress that we expect an active contribution from you on what are the important questions and which are not. Hence you can help with extending the list of examples below or even replace the examples by topics that are deemed more relevant. Second, we use performance drivers including quantitative models in the multi-asset funds. Hence the impact of risk management on these performance drivers and with it fund returns is also of crucial importance.

Examples
  • What indicators can help us with risk parity over time? Currently we use e.g. the VIX index, representing expected volatility from the US S&P500 equity options market. 
  • How should we weight asset classes relative to each other? How often should we rethink these weights?
  • How should we weight assets within the same asset class relative to each other?
  • Identify hidden risks. Should we impose cross-asset weight restrictions to avoid concentrated risks?
  • For all decisions above we need to monitor the impact on the performance of the quantitative strategies employed by our multi asset funds. E.g. how do these strategies perform in different risk regimes?
  • Risk balance performance drivers: We employ multiple performance drivers and we have a desired risk contribution of each of these performance drivers. How can we best achieve this goal?

Selected literature
Hallerbach, W.G. (2015) “Advances in Portfolio Risk Control.” Forthcoming as Chapter 1 in E. Jurczenko (editor), “Risk-Based and Factor Investing.” Elsevier/ISTE Press Ltd., London. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2259041

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Let us know your motivation and send it together with your CV and list of grades to SQ@robeco.nl. For more information call us on: +31 - 10 - 224 2499