Total Return Strategies for Multi-Asset Portfolios: Dynamically Managing Portfolio Risk

Posted: 25 Oct 2007

See all articles by Ulf Herold

Ulf Herold

Metzler Investment GmbH; Goethe University Frankfurt - Faculty of Economics and Business Administration

Raimond Maurer

Goethe University Frankfurt - Finance Department

Michael Z. Stamos

Allianz Global Investors

Huy Thanh Vo

Goethe University Frankfurt, Finance Department

Abstract

Traditional balanced funds with a more or less constant stock allocation cannot solve the conflict of various investment horizons that most institutional investors face. In order to generate capital gains, large allocations in risky asset classes such as equities are needed. However, this is not reconcilable with short-term requirements such as avoiding losses on an annual basis. In this article, we investigate a risk-based total return strategy that explicitly controls for shortfall risk and that, at the same time, utilizes the available risk budget in an effective way to enhance the performance potential in the long-run. As it allows for larger shifts in asset class weights over time, it can start with larger allocations to stocks or other risky asset classes compared to static strategies. We compare this risk-based strategy to several dynamic asset allocation approaches in a backtest and also provide an extensive simulation study to quantify short-run hedging effectiveness and long-run hedging costs.

Keywords: shortfall risk, total return strategies, portfolio insurance, rainbow options

Suggested Citation

Herold, Ulf and Maurer, Raimond and Stamos, Michael Z. and Vo, Huy Thanh, Total Return Strategies for Multi-Asset Portfolios: Dynamically Managing Portfolio Risk. Journal of Portfolio Management, Vol. 33, No. 2, 2007, Available at SSRN: https://ssrn.com/abstract=1024271

Ulf Herold (Contact Author)

Metzler Investment GmbH ( email )

P. O. Box 20 01 38
60605 Frankfurt am Main
Germany

Goethe University Frankfurt - Faculty of Economics and Business Administration

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Raimond Maurer

Goethe University Frankfurt - Finance Department ( email )

Theodor-W.-Adorno-Platz 3
House of Finance
Frankfurt, 60323
Germany

Michael Z. Stamos

Allianz Global Investors ( email )

Mainzer Landstrasse 11-13
Frankfurt, 60329
Germany

Huy Thanh Vo

Goethe University Frankfurt, Finance Department ( email )

Grüneburgplatz 1
House of Finance
Frankfurt, 60323
Germany

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