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zee4


Total Posts: 57
Joined: May 2010
 
Posted: 2015-11-11 16:40
There are plenty of companies that do complex asset allocation, risk budgeting, portfolio optimization etc. Let's say there is a company ABC with diversified investment portfolio. They do traditional bonds/equities, alternative investments (PE/HF/RE etc.). Which basically translates into different departments that carry out specific tasks.

My understanding is if the economists/strategists of the company come up with certain view for 3-5 years (like EM is going to outperform) they sit together and try to steer everybody towards EM. FI/Equities managers start buying EM debt and equities, PE/HF start investing into EM based PE and HF funds so on and so forth. Those economists/strategists may not only offer opportunities but come up with dangers and risky areas.

What I am trying to understand is can those teams completely ignore economists/strategists view and continue doing whatever they think is best? Should the managers be punished for not taking the company's strategists view into account in making investment decisions? Is it reasonable for PE/HF teams start liquidating long term (7-10 years) investments based on the offered views? I hope I am making sense here. If not, I will come back and try to elaborate more.

I also have some questions regarding the risk budgeting. I would appreciate if you could share any good resources (active risk, anchoring, tactical view, tilting etc. about which I have very superficial knowledge).

Бухарский

chiral3
Founding Member

Total Posts: 4983
Joined: Mar 2004
 
Posted: 2015-11-11 18:19
You're basically referring to the job the CIO does (the PMs that work for the CIO). For many companies there are strategic asset allocations that incorporate the views, restrictions, and objectives of the company (depending on the space). These will vary by regular corporates, asset managers managing third party business, pensions, insurers, mutuals, PE shops, etc. For instance mutuals, PEs, and insurance companies will have different requirements that could inform their SAAs. TAAs also exist to tilt short-term performance while not hurting long-term strategic goals. Long-term goals may be based on returns, risk adj returns, liquidity, capital management, duration management, regulatory constraints, financing agreements, fiduciaries (the proprietary customer versus the third party).

To shoehorn into your OP: in general the business determines the type of strategist that will inform the strategies general constraints which are in turn executed by a range of PMs that work for (generally) the CIO.

Nonius is Satoshi Nakamoto. 物の哀れ

rickyvic


Total Posts: 117
Joined: Jul 2013
 
Posted: 2015-11-26 19:51
....What I am trying to understand is can those teams completely ignore economists/strategists view and continue doing whatever they think is best? Should the managers be punished for not taking the company's strategists view into account in making investment decisions? Is it reasonable for PE/HF teams start liquidating long term (7-10 years) investments based on the offered views? I hope I am making sense here. If not, I will come back and try to elaborate more.....

TAA and GTAA are strategies, you can also have asset allocation strategies that are actually meta-strategies. This means investing and so changing weights on single strategies rather than markets/contracts, based on some macro or tactical (eg recent performance indicators) view, it can be a model, it could be discretionary.

This is in fact the job of the cio or a pm that handles many strategies/asset classes.

Managers punished no, they can get fired if they underperform a lot compared to target and are careless, eg no listening to everyone's opinions.

Rebalancing a LT portfolio why not if that is what you think is sensible? I would take into account costs though, especially if recommendations change often.

Making sense not too much for now, I hope it helps a bit though

"amicus Plato sed magis amica Veritas"

Kitno


Total Posts: 337
Joined: Mar 2005
 
Posted: 2016-09-25 23:59
I have to say I think this the single most insightful question ever asked on the site (and I've been here 11 years)!

You've given me food for thought. The ability to foresee or know this re-allocation action is of immense value to a dealer. Insufficient time is given to 'where will our clients re-allocate'? Rather than thinking about month end or the turn and how to position yourself.

A lot of it is procedural to the asset allocator - not that us sellside think like that. I mean, if you under-perform you have to risk up e.g. out of IG into HY - greater upside right? Some of this procedural play is prescribed (even mandated) in the fund rules or legislation (in the case with under-performing pension funds).

Us sellside idiots are too dense to think about the wider picture and focus on the security technicals or macro month end flows explaining away why we were screwed last month...

"The reputation of a firm is like a very delicate living organism which can easily be damaged and which has to be taken care of incessantly, being mainly a matter of human behaviour and human standards." - Warburg
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