Risk Control through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation

This paper draws on dynamic risk-budgeting techniques to emphasise the importance of risk management when decisions to allocate to ETFs are made.

Author(s):

Noel Amenc

Professor of finance and director of EDHEC-Risk Institute.

Felix Goltz

Head of applied research at EDHEC-Risk Institute.

Adina Grigoriu

Head of asset allocation at AM International Consulting,

Absolute return funds, in which the low-risk profiles of government bond ETFs and conditional allocations to riskier equity ETFs can be combined to obtain portfolios thatbeyond the natural diversification between stocks and bonds provide upside potential while protecting investors from downside risk, are an initial application of ETFs to allocation decisions. A second application is risk control of tactical strategies. Dynamic risk budgeting is used to provide risk-controlled exposuretaking the manager's forecasts as a givento an asset class. This paper shows that, even if the manager is an excellent forecaster, this approach yields intra-horizon and end-ofhorizon risk-control benefits considerably greater than those of standard tactical asset allocation.

Type: EDHEC Publication
Date: le 04/01/2010
Research Cluster : Finance

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