Dynamic Beta: Getting Paid to Manage Risks

Abstract

Dynamic beta is a program that dynamically allocates to beta assets based on formal rules. It contrasts with standard mean-variance optimization and static risk-parity approaches, which are static. Dynamic beta lowers the overall risk of the fund — where risk includes volatility of returns plus drawdown — while earning a positive return. A dynamic beta program implemented through an overlay and customized to each investor’s needs can help manage portfolio risk from an asset-only perspective or an asset-liability perspective. The introduction of dynamic beta provides substantial improvements for traditional investment portfolios as well as portfolios with risk-parity approaches and allocations to alternatives. The dynamic beta program differs from a global macro/global tactical asset allocation program in its objectives and design. This article proposes that dynamic beta is a more-intelligent, more-informed approach to dynamically manage risk and return. It also places the dynamic beta program within the constraints of typical institutional investment portfolios by addressing governance and implementation issues.

Keywords: dynamic beta, intelligent rebalancing

JEL Classification: G10, G11, G23