Revisiting Core-Satellite Investing - A Dynamic Model of Relative Risk Management

Noël Amenc, Philippe Malaise, Lionel Martellini: Tracking error is not necessarily bad. Just like with good and bad cholesterol, there is “good” tracking error, which refers to outperformance of a portfolio with respect to the benchmark, and “bad” tracking error, which refers to underperformance with respect to the benchmark.

Author(s):

Noel Amenc

Professor of Finance, EDHEC Business SchoolDirector, EDHEC-Risk Institute

Philippe Malaise

Professor of Finance, EDHEC Business SchoolAssociate Researcher, EDHEC-Risk Institute

Lionel Martellini

Professor of Finance, EDHEC Business SchoolScientific Director, EDHEC-Risk Institute

By severely restricting the amounts invested in active strategies as a result of tight tracking error constraints, investors forgive an opportunity for significant outperformance, especially during market downturns. In this paper, we introduce a new methodology that allows investors to gain full access to good tracking error, while maintaining the level of bad tracking error below a given threshold, based on an optimal dynamic adjustment of the fractions invested in a passive core versus an active satellite portfolio. This method can be regarded as a natural extension of constant proportion portfolio insurance techniques, originally designed to ensure the respect of absolute performance, to a relative return context.

Type: Working paper
Date: le 05/11/2012
Research Cluster : Finance

See Also

AGORA MEETS BERTRAND BADIE, POLITICAL SCIENTIST AND INTERNATIONAL RELATIONS SPECIALIST
News
- 21-10-2021
Agora students held another 'Rencontre de l'Agora' event on Wednesday 19 October, this...
Eiffel Excellence Scholarship: the most prestigious French scholarship you can get
News
- 21-10-2021
Mikhail Miroshnichenko joined EDHEC MiM Finance after his Bachelor’s degree in...
EDHEC-Auchan Learning Partnership: Retail industry transformations at the heart of EDHEC International BBA learning
News
- 20-10-2021
Auchan is joining forces with EDHEC to share its retail industry expertise with EDHEC...
The FIR-PRI Awards “Finance & Sustainability” prize for “best pedagogical innovation”: preparing future generations to fight climate change.
News
- 18-10-2021
At EDHEC, we want to take part in the fight against climate change. Through our...