PRANAY GUPTA has over 25 years of experience in managing multi-asset and multi-strategy portfolios of up to US$85 billion across the world for asset managers, sovereign wealth funds, insurance companies, pension plans, endowments and high-net-worth individuals. He has served as the Chairman of the Investment Committee at the CFA Institute Research Foundation and has been awarded as the Best Discretionary Asset Manager in Asia.SVEN R. SKALLSJÖ has designed and developed risk models at Ignis Asset Management, AGL Structured Finance and Shell Asset Management. BING LI is the president of BC Capital Management Ltd., a Hong Kong-based firm providing investment solutions for high-net-worth individuals in mainland China.

• Preface xiiiAbout the Authors xv1. An Introduction to the Multi-Asset Investment Problem 11.1 What is Multi-Asset Investing? 21.2 The Conventional Structure 41.3 Transitioning from Active Management to Exposure Allocation 41.4 Creating an Improved Allocation Structure 51.5 Constructing a Multi-Asset Portfolio to Manage Tail Risks 61.6 Multi-Asset Investing in Emerging Markets 61.7 From Multi-Asset Strategies to Multi-Asset Solutions 71.8 Structuring a Multi-Asset Business 72. The Traditional Allocation Structure 92.1 The Traditional Investment Process 102.2 The Asset Allocation Process 122.3 The Belief in Diversification 132.4 Harnessing Equity Risk Premium and the Investment Horizon 192.5 Asset Classes as Mutually Exclusive Silos 202.6 Organization Structure and Resource Allocation 202.7 Implications for Skill Required in Asset Allocation 212.8 Requirements for a Revised Allocation Solution 222.9 Parallel Debates Created in the Search for a Revised Allocation Solution 233. Transitioning from Active Management to Exposure Allocation 253.1 A Historic Rationalization of Alpha and Beta 263.2 Progression of Active Management 273.3 Generalizing the Beta Concept 273.4 The Demise of Asset Class Demarcated Allocation 283.5 Implications for the Active Investment Process 293.6 Investment Strategy Categorization 303.6.1 Fundamental, Quantitative and Technical 303.6.2 Top-down, Bottom-up and Relative Value 313.7 Positioning of Alternative Investments 313.8 Obsolescence of Portable Alpha 323.9 Positioning of Fundamental Indexation and Smart Beta 323.10 Risk in an Exposure-Based Framework 333.11 Horizon-Based Organizational Demarcation 343.12 Transition from an Asset-Based to an Exposure-Based Organization 343.13 Conclusion 374. Redefining Risk Premium for Multi-Asset Allocation Decisions 394.1 Incumbent Risk and Risk Premium Frameworks 404.2 Framework for the Concurrent Presence of All Asset Classes 414.3 Incorporating Intra-Horizon Risk 424.4 Risk and Return Premium for Allocation Silos 434.5 Asset Class Premiums – Comparison of Traditional and Proposed Methods 454.6 Asset Class Premiums – Impact of Different Investment Horizons 464.7 Asset Class Risk – Comparison of Traditional and Proposed Methods 474.8 Asset Class Risk – Impact of Different Investment Horizons 484.9 Sovereign Risk and Risk Premium 494.10 Application to Various Multi]Asset Investment Problem Scenarios 514.11 Conclusion 525. A Multi-Strategy Allocation Structure 535.1 Categories of Allocation Approaches 545.2 A Multi-Strategy Framework for the Allocation Problem 585.3 The Benefits of Strategy Diversification 595.4 Individual Allocation Methodology Requirements 615.5 Example of a Multi-Strategy Allocation Approach 635.6 Conclusion 666. A Fundamental Exposure Allocation Approach—Business Cycles 676.1 The Passive Economic Model 676.2 An Active Economic Approach 686.3 A Five Cycle Asset Allocation Approach 696.3.1 Cycle I – The Global Business Cycle 696.3.2 Cycle II – The Local Business Cycle 706.3.3 Cycle III – The Monetary Cycle 716.3.4 Cycle IV – The Credit and Capex Cycles 736.3.5 Cycle V – Market Cycle 736.4 Cycle Limiting Risk Parameters 736.5 Segregating the Core and Cyclical Components 746.6 The Composite Five Cycle Framework 757. A Systematic Exposure Allocation Process — Active Risk Budgeting 777.1 Modeling the Business Cycle 787.2 Modeling the Monetary Cycle 807.3 Risk Adjustment for Equity Valuation 817.4 Creating an Adjusted Risk Budgeting Allocation Methodology 827.5 Simulated Performance Results 857.6 Confirming Robustness of ARB Allocation Methodology 907.6.1 Performance in Different Time Periods 907.6.2 Performance in Different Market Conditions 907.7 Implementation of a Drawdown Management Process 948. Estimation of Asset Allocation 978.1 The Consensus Asset Allocation Dataset 978.2 Using Consensus Data for Allocation Decisions 988.2.1 Basic Allocation Decisions 988.2.2 Creating Tactical Allocation Changes 998.2.3 Conviction Level in Allocation Stances 1028.2.4 Currency Hedge Ratio Decisions 1038.2.5 Separating the Poor Forecasters from the Accurate Ones 1058.2.6 Contrasting the Variety of Allocation Methodologies 1059. Optimization for Multi-Asset Portfolios 1079.1 Evolution of the Mean Variance Framework 1079.2 Portfolio Allocation and Measures of Performance 1099.3 A Utility-Based Approach 1109.4 The Fund Manager’s Objectives 1109.5 The Efficient Frontier 1129.6 Optimal Portfolio Choice 1139.7 Incorporating the Constraints 1149.8 Tail Risk Constraint 1159.9 Event Risk 1159.10 Macro Risk 1169.11 Regime Risk 1169.12 Correlation Risk 1179.13 Formulation of the Optimization Problem 1189.14 The Unconstrained Allocation 1199.15 Applying the Constraints 1219.16 The Preferred Portfolio 1279.17 Conclusions 13010. Managing Tail Risk in Multi-Asset Portfolios 13310.1 Portfolio Management – The Practical Setting 13410.2 Asset Allocation – The Practical Setting 13410.3 Creating a Real Risk Measure: End-of-Horizon vs. Intra-Horizon Risk 13510.4 Model Uncertainty 13910.5 Stop-Losses 14310.6 Implementing Tail Risk Management 15010.7 Notation and Variables 15311. Multi-Asset Investing in Emerging Markets 15511.1 Observation 1: Sub-Optimal Geographic Categorization of Emerging Markets 15511.2 Observation 2: Inappropriate Sector Classification for Emerging Markets 15611.3 Observation 3: Stock Concentration in Equity Indices 15811.4 Observation 4: The Potential for Active Management 15911.5 Observation 5: Performance of Active Managers 15911.6 Observation 6: Over-Dependence on a Single Investment Decision 16211.7 Summary of Observations 16211.8 Pitfalls in Emerging Market Investment Frameworks 16311.9 An Improved Framework for Emerging Market Investments 16412. The Importance of Asset Allocation in Asian Equities 16912.1 Impact of Breadth on Portfolio Excess Return 16912.2 Impact of Varying Cross-Sectional Dispersion on Portfolio Excess Return 17012.3 The Relative Importance of Asset Allocation and Stock Selection 17212.4 Comparing the US and Asian Equity Investment Universe 17312.5 Conclusions 17613. Implementing a Multi-Asset Strategy – Active or Passive 17913.1 Investment Determinants for the Active-Passive Decision 17913.2 Asset Owner Constraints Impacting the Active–Passive Decision 18414. An Exposure-Based Risk Diagnostics Framework 18514.1 Shortcomings of a Traditional Risk Analysis Approach 18514.2 Evaluating Intended and Unintended Risk 18614.3 A Multi-Dimensional Risk Architecture 18714.3.1 Skill Analysis 18814.3.2 Investment Process Component Analysis 18914.3.3 Regime Risk Analysis 18914.3.4 Style and Factor Risk Analysis 19014.3.5 Macro Risk Analysis 19014.3.6 Stress Event Risk Analysis 19114.3.7 Peer Group Comparison Analysis 19215. Impact of Manager Compensation on Allocation Decisions 19515.1 Compensation Structure 19615.2 Managerial Constraints 19715.2.1 Managerial Skill 19815.2.2 Managerial Risk Preferences 19815.3 Optimal Activeness 19915.4 The Distribution of Performance 20215.5 The Importance of Skill 20315.6 Activeness and Age 20515.7 Implications for a Multi-Period Setting 20615.7.1 Compensation Structure 20615.7.2 The Distribution of Performance 20615.8 Examples of Managerial Contracts 20815.9 Conclusions 20916. From Multi-Asset Strategies to Multi-Asset Solutions 21116.1 Current Phase of Industry Transition 21316.2 Multi-Asset Solutions as an Industry Function 21416.3 Characteristics of a Multi-Asset Solution Provider 21516.4 Customization Parameters for an Investment Solution 21516.5 Requirements for a Standardized Implementation 21916.6 The Importance of Attributing Performance 21916.7 Conclusions 22017. Multi-Asset Investing for Private Wealth Assets 22117.1 The Private Wealth Multi-Asset Investment Problem 22117.2 Business Model and Organizational Issues 22417.3 Incumbent Investment Frameworks 22617.4 A Multi-Asset Private Wealth Investment Platform 22717.5 Goals-Based Allocation 22817.6 Implication for the Long-Only Active Manager 23017.7 Conclusions 23018. Structuring a Multi-Asset Investing Business 23318.1 Product Structure and Positioning 23318.2 Product Advantages and Disadvantages 23518.3 Product Investment Skills 23618.4 Target Client Segmentation 23718.5 Where Did Existing Products Fall Short? 23818.6 Client Segment – Expectations and Evaluation 24219. Competing for Better Institutional Investment Outcomes 24519.1 Mission and Beliefs – The First and Most Critical Step 24619.2 Frameworks: Traditional Asset Class Versus Risk Premium 24819.3 Linking Beliefs With Return Drivers and Portfolio Construction Decisions 25019.3.1 A New Perspective 25219.3.2 A Wider Opportunity Set for Exploiting Alpha 25319.3.3 Ensuring That Everything Is Consistent with Beliefs 25519.4 Governance Consideration 25619.4.1 Closing the Governance Gap: Build or Buy 25619.4.2 The Separation of Governing and Executive Functions 25719.5 Choosing an Implementation Route for Delegation 25919.5.1 Bundling Multiple Investment Strategies into Pooled Funds 25919.5.2 Fully Bespoke Implementation 26019.6 Monitoring 26219.7 Conclusions 263Bibliography and References 265Index 269

PRANAY GUPTA has over 25 years of experience in managing multi-asset and multi-strategy portfolios of up to US$85 billion across the world for asset managers, sovereign wealth funds, insurance companies, pension plans, endowments and high-net-worth individuals. He has served as the Chairman of the Investment Committee at the CFA Institute Research Foundation and has been awarded as the Best Discretionary Asset Manager in Asia.SVEN R. SKALLSJÖ has designed and developed risk models at Ignis Asset Management, AGL Structured Finance and Shell Asset Management. BING LI is the president of BC Capital Management Ltd., a Hong Kong-based firm providing investment solutions for high-net-worth individuals in mainland China.

• Preface xiiiAbout the Authors xv1. An Introduction to the Multi-Asset Investment Problem 11.1 What is Multi-Asset Investing? 21.2 The Conventional Structure 41.3 Transitioning from Active Management to Exposure Allocation 41.4 Creating an Improved Allocation Structure 51.5 Constructing a Multi-Asset Portfolio to Manage Tail Risks 61.6 Multi-Asset Investing in Emerging Markets 61.7 From Multi-Asset Strategies to Multi-Asset Solutions 71.8 Structuring a Multi-Asset Business 72. The Traditional Allocation Structure 92.1 The Traditional Investment Process 102.2 The Asset Allocation Process 122.3 The Belief in Diversification 132.4 Harnessing Equity Risk Premium and the Investment Horizon 192.5 Asset Classes as Mutually Exclusive Silos 202.6 Organization Structure and Resource Allocation 202.7 Implications for Skill Required in Asset Allocation 212.8 Requirements for a Revised Allocation Solution 222.9 Parallel Debates Created in the Search for a Revised Allocation Solution 233. Transitioning from Active Management to Exposure Allocation 253.1 A Historic Rationalization of Alpha and Beta 263.2 Progression of Active Management 273.3 Generalizing the Beta Concept 273.4 The Demise of Asset Class Demarcated Allocation 283.5 Implications for the Active Investment Process 293.6 Investment Strategy Categorization 303.6.1 Fundamental, Quantitative and Technical 303.6.2 Top-down, Bottom-up and Relative Value 313.7 Positioning of Alternative Investments 313.8 Obsolescence of Portable Alpha 323.9 Positioning of Fundamental Indexation and Smart Beta 323.10 Risk in an Exposure-Based Framework 333.11 Horizon-Based Organizational Demarcation 343.12 Transition from an Asset-Based to an Exposure-Based Organization 343.13 Conclusion 374. Redefining Risk Premium for Multi-Asset Allocation Decisions 394.1 Incumbent Risk and Risk Premium Frameworks 404.2 Framework for the Concurrent Presence of All Asset Classes 414.3 Incorporating Intra-Horizon Risk 424.4 Risk and Return Premium for Allocation Silos 434.5 Asset Class Premiums – Comparison of Traditional and Proposed Methods 454.6 Asset Class Premiums – Impact of Different Investment Horizons 464.7 Asset Class Risk – Comparison of Traditional and Proposed Methods 474.8 Asset Class Risk – Impact of Different Investment Horizons 484.9 Sovereign Risk and Risk Premium 494.10 Application to Various Multi]Asset Investment Problem Scenarios 514.11 Conclusion 525. A Multi-Strategy Allocation Structure 535.1 Categories of Allocation Approaches 545.2 A Multi-Strategy Framework for the Allocation Problem 585.3 The Benefits of Strategy Diversification 595.4 Individual Allocation Methodology Requirements 615.5 Example of a Multi-Strategy Allocation Approach 635.6 Conclusion 666. A Fundamental Exposure Allocation Approach—Business Cycles 676.1 The Passive Economic Model 676.2 An Active Economic Approach 686.3 A Five Cycle Asset Allocation Approach 696.3.1 Cycle I – The Global Business Cycle 696.3.2 Cycle II – The Local Business Cycle 706.3.3 Cycle III – The Monetary Cycle 716.3.4 Cycle IV – The Credit and Capex Cycles 736.3.5 Cycle V – Market Cycle 736.4 Cycle Limiting Risk Parameters 736.5 Segregating the Core and Cyclical Components 746.6 The Composite Five Cycle Framework 757. A Systematic Exposure Allocation Process — Active Risk Budgeting 777.1 Modeling the Business Cycle 787.2 Modeling the Monetary Cycle 807.3 Risk Adjustment for Equity Valuation 817.4 Creating an Adjusted Risk Budgeting Allocation Methodology 827.5 Simulated Performance Results 857.6 Confirming Robustness of ARB Allocation Methodology 907.6.1 Performance in Different Time Periods 907.6.2 Performance in Different Market Conditions 907.7 Implementation of a Drawdown Management Process 948. Estimation of Asset Allocation 978.1 The Consensus Asset Allocation Dataset 978.2 Using Consensus Data for Allocation Decisions 988.2.1 Basic Allocation Decisions 988.2.2 Creating Tactical Allocation Changes 998.2.3 Conviction Level in Allocation Stances 1028.2.4 Currency Hedge Ratio Decisions 1038.2.5 Separating the Poor Forecasters from the Accurate Ones 1058.2.6 Contrasting the Variety of Allocation Methodologies 1059. Optimization for Multi-Asset Portfolios 1079.1 Evolution of the Mean Variance Framework 1079.2 Portfolio Allocation and Measures of Performance 1099.3 A Utility-Based Approach 1109.4 The Fund Manager’s Objectives 1109.5 The Efficient Frontier 1129.6 Optimal Portfolio Choice 1139.7 Incorporating the Constraints 1149.8 Tail Risk Constraint 1159.9 Event Risk 1159.10 Macro Risk 1169.11 Regime Risk 1169.12 Correlation Risk 1179.13 Formulation of the Optimization Problem 1189.14 The Unconstrained Allocation 1199.15 Applying the Constraints 1219.16 The Preferred Portfolio 1279.17 Conclusions 13010. Managing Tail Risk in Multi-Asset Portfolios 13310.1 Portfolio Management – The Practical Setting 13410.2 Asset Allocation – The Practical Setting 13410.3 Creating a Real Risk Measure: End-of-Horizon vs. Intra-Horizon Risk 13510.4 Model Uncertainty 13910.5 Stop-Losses 14310.6 Implementing Tail Risk Management 15010.7 Notation and Variables 15311. Multi-Asset Investing in Emerging Markets 15511.1 Observation 1: Sub-Optimal Geographic Categorization of Emerging Markets 15511.2 Observation 2: Inappropriate Sector Classification for Emerging Markets 15611.3 Observation 3: Stock Concentration in Equity Indices 15811.4 Observation 4: The Potential for Active Management 15911.5 Observation 5: Performance of Active Managers 15911.6 Observation 6: Over-Dependence on a Single Investment Decision 16211.7 Summary of Observations 16211.8 Pitfalls in Emerging Market Investment Frameworks 16311.9 An Improved Framework for Emerging Market Investments 16412. The Importance of Asset Allocation in Asian Equities 16912.1 Impact of Breadth on Portfolio Excess Return 16912.2 Impact of Varying Cross-Sectional Dispersion on Portfolio Excess Return 17012.3 The Relative Importance of Asset Allocation and Stock Selection 17212.4 Comparing the US and Asian Equity Investment Universe 17312.5 Conclusions 17613. Implementing a Multi-Asset Strategy – Active or Passive 17913.1 Investment Determinants for the Active-Passive Decision 17913.2 Asset Owner Constraints Impacting the Active–Passive Decision 18414. An Exposure-Based Risk Diagnostics Framework 18514.1 Shortcomings of a Traditional Risk Analysis Approach 18514.2 Evaluating Intended and Unintended Risk 18614.3 A Multi-Dimensional Risk Architecture 18714.3.1 Skill Analysis 18814.3.2 Investment Process Component Analysis 18914.3.3 Regime Risk Analysis 18914.3.4 Style and Factor Risk Analysis 19014.3.5 Macro Risk Analysis 19014.3.6 Stress Event Risk Analysis 19114.3.7 Peer Group Comparison Analysis 19215. Impact of Manager Compensation on Allocation Decisions 19515.1 Compensation Structure 19615.2 Managerial Constraints 19715.2.1 Managerial Skill 19815.2.2 Managerial Risk Preferences 19815.3 Optimal Activeness 19915.4 The Distribution of Performance 20215.5 The Importance of Skill 20315.6 Activeness and Age 20515.7 Implications for a Multi-Period Setting 20615.7.1 Compensation Structure 20615.7.2 The Distribution of Performance 20615.8 Examples of Managerial Contracts 20815.9 Conclusions 20916. From Multi-Asset Strategies to Multi-Asset Solutions 21116.1 Current Phase of Industry Transition 21316.2 Multi-Asset Solutions as an Industry Function 21416.3 Characteristics of a Multi-Asset Solution Provider 21516.4 Customization Parameters for an Investment Solution 21516.5 Requirements for a Standardized Implementation 21916.6 The Importance of Attributing Performance 21916.7 Conclusions 22017. Multi-Asset Investing for Private Wealth Assets 22117.1 The Private Wealth Multi-Asset Investment Problem 22117.2 Business Model and Organizational Issues 22417.3 Incumbent Investment Frameworks 22617.4 A Multi-Asset Private Wealth Investment Platform 22717.5 Goals-Based Allocation 22817.6 Implication for the Long-Only Active Manager 23017.7 Conclusions 23018. Structuring a Multi-Asset Investing Business 23318.1 Product Structure and Positioning 23318.2 Product Advantages and Disadvantages 23518.3 Product Investment Skills 23618.4 Target Client Segmentation 23718.5 Where Did Existing Products Fall Short? 23818.6 Client Segment – Expectations and Evaluation 24219. Competing for Better Institutional Investment Outcomes 24519.1 Mission and Beliefs – The First and Most Critical Step 24619.2 Frameworks: Traditional Asset Class Versus Risk Premium 24819.3 Linking Beliefs With Return Drivers and Portfolio Construction Decisions 25019.3.1 A New Perspective 25219.3.2 A Wider Opportunity Set for Exploiting Alpha 25319.3.3 Ensuring That Everything Is Consistent with Beliefs 25519.4 Governance Consideration 25619.4.1 Closing the Governance Gap: Build or Buy 25619.4.2 The Separation of Governing and Executive Functions 25719.5 Choosing an Implementation Route for Delegation 25919.5.1 Bundling Multiple Investment Strategies into Pooled Funds 25919.5.2 Fully Bespoke Implementation 26019.6 Monitoring 26219.7 Conclusions 263Bibliography and References 265Index 269

PRANAY GUPTA has over 25 years of experience in managing multi-asset and multi-strategy portfolios of up to US$85 billion across the world for asset managers, sovereign wealth funds, insurance companies, pension plans, endowments and high-net-worth individuals. He has served as the Chairman of the Investment Committee at the CFA Institute Research Foundation and has been awarded as the Best Discretionary Asset Manager in Asia.SVEN R. SKALLSJÖ has designed and developed risk models at Ignis Asset Management, AGL Structured Finance and Shell Asset Management. BING LI is the president of BC Capital Management Ltd., a Hong Kong-based firm providing investment solutions for high-net-worth individuals in mainland China.

• Preface xiiiAbout the Authors xv1. An Introduction to the Multi-Asset Investment Problem 11.1 What is Multi-Asset Investing? 21.2 The Conventional Structure 41.3 Transitioning from Active Management to Exposure Allocation 41.4 Creating an Improved Allocation Structure 51.5 Constructing a Multi-Asset Portfolio to Manage Tail Risks 61.6 Multi-Asset Investing in Emerging Markets 61.7 From Multi-Asset Strategies to Multi-Asset Solutions 71.8 Structuring a Multi-Asset Business 72. The Traditional Allocation Structure 92.1 The Traditional Investment Process 102.2 The Asset Allocation Process 122.3 The Belief in Diversification 132.4 Harnessing Equity Risk Premium and the Investment Horizon 192.5 Asset Classes as Mutually Exclusive Silos 202.6 Organization Structure and Resource Allocation 202.7 Implications for Skill Required in Asset Allocation 212.8 Requirements for a Revised Allocation Solution 222.9 Parallel Debates Created in the Search for a Revised Allocation Solution 233. Transitioning from Active Management to Exposure Allocation 253.1 A Historic Rationalization of Alpha and Beta 263.2 Progression of Active Management 273.3 Generalizing the Beta Concept 273.4 The Demise of Asset Class Demarcated Allocation 283.5 Implications for the Active Investment Process 293.6 Investment Strategy Categorization 303.6.1 Fundamental, Quantitative and Technical 303.6.2 Top-down, Bottom-up and Relative Value 313.7 Positioning of Alternative Investments 313.8 Obsolescence of Portable Alpha 323.9 Positioning of Fundamental Indexation and Smart Beta 323.10 Risk in an Exposure-Based Framework 333.11 Horizon-Based Organizational Demarcation 343.12 Transition from an Asset-Based to an Exposure-Based Organization 343.13 Conclusion 374. Redefining Risk Premium for Multi-Asset Allocation Decisions 394.1 Incumbent Risk and Risk Premium Frameworks 404.2 Framework for the Concurrent Presence of All Asset Classes 414.3 Incorporating Intra-Horizon Risk 424.4 Risk and Return Premium for Allocation Silos 434.5 Asset Class Premiums – Comparison of Traditional and Proposed Methods 454.6 Asset Class Premiums – Impact of Different Investment Horizons 464.7 Asset Class Risk – Comparison of Traditional and Proposed Methods 474.8 Asset Class Risk – Impact of Different Investment Horizons 484.9 Sovereign Risk and Risk Premium 494.10 Application to Various Multi]Asset Investment Problem Scenarios 514.11 Conclusion 525. A Multi-Strategy Allocation Structure 535.1 Categories of Allocation Approaches 545.2 A Multi-Strategy Framework for the Allocation Problem 585.3 The Benefits of Strategy Diversification 595.4 Individual Allocation Methodology Requirements 615.5 Example of a Multi-Strategy Allocation Approach 635.6 Conclusion 666. A Fundamental Exposure Allocation Approach—Business Cycles 676.1 The Passive Economic Model 676.2 An Active Economic Approach 686.3 A Five Cycle Asset Allocation Approach 696.3.1 Cycle I – The Global Business Cycle 696.3.2 Cycle II – The Local Business Cycle 706.3.3 Cycle III – The Monetary Cycle 716.3.4 Cycle IV – The Credit and Capex Cycles 736.3.5 Cycle V – Market Cycle 736.4 Cycle Limiting Risk Parameters 736.5 Segregating the Core and Cyclical Components 746.6 The Composite Five Cycle Framework 757. A Systematic Exposure Allocation Process — Active Risk Budgeting 777.1 Modeling the Business Cycle 787.2 Modeling the Monetary Cycle 807.3 Risk Adjustment for Equity Valuation 817.4 Creating an Adjusted Risk Budgeting Allocation Methodology 827.5 Simulated Performance Results 857.6 Confirming Robustness of ARB Allocation Methodology 907.6.1 Performance in Different Time Periods 907.6.2 Performance in Different Market Conditions 907.7 Implementation of a Drawdown Management Process 948. Estimation of Asset Allocation 978.1 The Consensus Asset Allocation Dataset 978.2 Using Consensus Data for Allocation Decisions 988.2.1 Basic Allocation Decisions 988.2.2 Creating Tactical Allocation Changes 998.2.3 Conviction Level in Allocation Stances 1028.2.4 Currency Hedge Ratio Decisions 1038.2.5 Separating the Poor Forecasters from the Accurate Ones 1058.2.6 Contrasting the Variety of Allocation Methodologies 1059. Optimization for Multi-Asset Portfolios 1079.1 Evolution of the Mean Variance Framework 1079.2 Portfolio Allocation and Measures of Performance 1099.3 A Utility-Based Approach 1109.4 The Fund Manager’s Objectives 1109.5 The Efficient Frontier 1129.6 Optimal Portfolio Choice 1139.7 Incorporating the Constraints 1149.8 Tail Risk Constraint 1159.9 Event Risk 1159.10 Macro Risk 1169.11 Regime Risk 1169.12 Correlation Risk 1179.13 Formulation of the Optimization Problem 1189.14 The Unconstrained Allocation 1199.15 Applying the Constraints 1219.16 The Preferred Portfolio 1279.17 Conclusions 13010. Managing Tail Risk in Multi-Asset Portfolios 13310.1 Portfolio Management – The Practical Setting 13410.2 Asset Allocation – The Practical Setting 13410.3 Creating a Real Risk Measure: End-of-Horizon vs. Intra-Horizon Risk 13510.4 Model Uncertainty 13910.5 Stop-Losses 14310.6 Implementing Tail Risk Management 15010.7 Notation and Variables 15311. Multi-Asset Investing in Emerging Markets 15511.1 Observation 1: Sub-Optimal Geographic Categorization of Emerging Markets 15511.2 Observation 2: Inappropriate Sector Classification for Emerging Markets 15611.3 Observation 3: Stock Concentration in Equity Indices 15811.4 Observation 4: The Potential for Active Management 15911.5 Observation 5: Performance of Active Managers 15911.6 Observation 6: Over-Dependence on a Single Investment Decision 16211.7 Summary of Observations 16211.8 Pitfalls in Emerging Market Investment Frameworks 16311.9 An Improved Framework for Emerging Market Investments 16412. The Importance of Asset Allocation in Asian Equities 16912.1 Impact of Breadth on Portfolio Excess Return 16912.2 Impact of Varying Cross-Sectional Dispersion on Portfolio Excess Return 17012.3 The Relative Importance of Asset Allocation and Stock Selection 17212.4 Comparing the US and Asian Equity Investment Universe 17312.5 Conclusions 17613. Implementing a Multi-Asset Strategy – Active or Passive 17913.1 Investment Determinants for the Active-Passive Decision 17913.2 Asset Owner Constraints Impacting the Active–Passive Decision 18414. An Exposure-Based Risk Diagnostics Framework 18514.1 Shortcomings of a Traditional Risk Analysis Approach 18514.2 Evaluating Intended and Unintended Risk 18614.3 A Multi-Dimensional Risk Architecture 18714.3.1 Skill Analysis 18814.3.2 Investment Process Component Analysis 18914.3.3 Regime Risk Analysis 18914.3.4 Style and Factor Risk Analysis 19014.3.5 Macro Risk Analysis 19014.3.6 Stress Event Risk Analysis 19114.3.7 Peer Group Comparison Analysis 19215. Impact of Manager Compensation on Allocation Decisions 19515.1 Compensation Structure 19615.2 Managerial Constraints 19715.2.1 Managerial Skill 19815.2.2 Managerial Risk Preferences 19815.3 Optimal Activeness 19915.4 The Distribution of Performance 20215.5 The Importance of Skill 20315.6 Activeness and Age 20515.7 Implications for a Multi-Period Setting 20615.7.1 Compensation Structure 20615.7.2 The Distribution of Performance 20615.8 Examples of Managerial Contracts 20815.9 Conclusions 20916. From Multi-Asset Strategies to Multi-Asset Solutions 21116.1 Current Phase of Industry Transition 21316.2 Multi-Asset Solutions as an Industry Function 21416.3 Characteristics of a Multi-Asset Solution Provider 21516.4 Customization Parameters for an Investment Solution 21516.5 Requirements for a Standardized Implementation 21916.6 The Importance of Attributing Performance 21916.7 Conclusions 22017. Multi-Asset Investing for Private Wealth Assets 22117.1 The Private Wealth Multi-Asset Investment Problem 22117.2 Business Model and Organizational Issues 22417.3 Incumbent Investment Frameworks 22617.4 A Multi-Asset Private Wealth Investment Platform 22717.5 Goals-Based Allocation 22817.6 Implication for the Long-Only Active Manager 23017.7 Conclusions 23018. Structuring a Multi-Asset Investing Business 23318.1 Product Structure and Positioning 23318.2 Product Advantages and Disadvantages 23518.3 Product Investment Skills 23618.4 Target Client Segmentation 23718.5 Where Did Existing Products Fall Short? 23818.6 Client Segment – Expectations and Evaluation 24219. Competing for Better Institutional Investment Outcomes 24519.1 Mission and Beliefs – The First and Most Critical Step 24619.2 Frameworks: Traditional Asset Class Versus Risk Premium 24819.3 Linking Beliefs With Return Drivers and Portfolio Construction Decisions 25019.3.1 A New Perspective 25219.3.2 A Wider Opportunity Set for Exploiting Alpha 25319.3.3 Ensuring That Everything Is Consistent with Beliefs 25519.4 Governance Consideration 25619.4.1 Closing the Governance Gap: Build or Buy 25619.4.2 The Separation of Governing and Executive Functions 25719.5 Choosing an Implementation Route for Delegation 25919.5.1 Bundling Multiple Investment Strategies into Pooled Funds 25919.5.2 Fully Bespoke Implementation 26019.6 Monitoring 26219.7 Conclusions 263Bibliography and References 265Index 269