Active Asset Allocation Solutions
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Transcript of Active Asset Allocation Solutions
A new approach to asset allocation
Certified by
Active Asset Allocation Solutions Implementations
We Protect, You Perform
Conciliate security and performance comes with a perfect control of risk
Notre VisionOur Vision
Active Asset Allocation puts in pratice a responsible approach to preserve the financial ressources managed for the long term, such as pensions of future generations
By applying the state-of-the-art of the academic research to the investment world, Active Asset Allocation brings financial engineering to the service of institutional investors. The rare combination of academic expertise and investment experience allows Active Asset Allocation to help investors define and understand better their risks in order to manage them in a sustainable way
Active Asset Allocation designs asset allocation solutions that help investors and asset managers to honor their commitments, either by optimising ALM for the former or by controlling the inherent risk of the assets for the latter
Active Asset Allocation philosophy relies on portfolio insurance techniques that aim to better preserve capital and maximize performances within the constraints decided by each investor
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Active Asset Allocation
Active Asset Allocation Solutions Implementations
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Notre MétierOur ActivityPromote innovation within the asset allocation world thanks to our academic research and its application to the investment world
Help the investor define the set of risks and thresholds that should not be exceeded
Add value by creating a customised solution for the investor by adapting the asset allocation to his constraints and not to return forecasts
Help asset managers design diversified funds (including target-date funds) capable of respecting risk parameters and preserving the invested capital
Study and find in a stochastic environment (stress tests with at least 1000 scenarios) an optimal asset allocation between a protective « core » and more risky « satellites » capturing the performance. The allocation will be based only on the risk limits that we have established with investors and that takes into account their particular needs and constraints, including regulation. Our decisions do not depend on mathematical forecasts of gains and losses
Consider risk management as a new leverage of structural performance for asset management
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Active Asset Allocation
Active Asset Allocation Solutions Implementations
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Our Activity
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Protection in case of a sudden and unexpected
event
We identify your constraints and the asset classes you
would like to invest in
We upgrade on an on-going basis our models thanks to
our internal research
We monitor daily your portfolio and
the level of risk
We design a customised model
and test it in a stochastic
environment
Monthly we propose a
rebalancing of your asset allocation
We advise you on the asset allocation, you keep the control of your investments
Dynamic Allocation
Customization of solutions and
stress test
Client Input
Research and Innovation
Active Asset Allocation
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Notre ExpertiseOur Expertise
Active Asset Allocation offers to private banks, asset managers and institutional investors its expertise in dynamic asset allocation, including in a ALM environment (presence of liabilities):
approach based on risk management only
a real alternative to diversification or tactical allocation, which did not produce the expected results these last years, especially when it comes to risk management and capital preservation
a real alternative in ALM compared to fixed allocation strategies or de-risking strategies, the objective of which is to reduce exposure to risky assets when a threshold is reached in terms of capital
Active Asset Allocation use state-of-the-art asset allocation models and a proprietary approach developed through research in finance, combined with extensive investment experience
Active Asset Allocation
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Quelques publications décrivant les bases de notre approche
Publications relative to our approach
“In defense of Pro-cyclicality”, IPE Investment Pensions Europe, Avril 2012, Adina Grigoriu
“Risk Control through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation”, The Journal of Alternative Investments, Fall 2010, pp. 47 – 57, Noel Amenc, Felix Goltz, Adina Grigoriu
“The EDHEC European ETF Survey 2010” – An EDHEC-Risk Institute Publication, May 2010, Felix Goltz, Adina Grigoriu, Lin Tang
“Risk Control through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation” – An EDHEC-Risk Institute Publication, January 2010, Noel Amenc, Felix Goltz, Adina Grigoriu
“Constructing Absolute Return Funds with ETFs – A Dynamic Risk Budgeting Approach”, Institutional Investor Journal, Fall 2008, Vol. 2008, No. 1: pp. 37 – 46, Noel Amenc, Felix Goltz, Adina Grigoriu
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Memberships and Labels
Active Asset Allocation
Active Asset Allocation has developed a partnership with the Centre for Complexity and Interdisciplinary Studies in Finance (CCISF), a research centre from the University of NiceSophia Antipolis, promoting new and cutting edge interdisciplinary research on financial markets seen as complex systems. The research centre is supported by the CNRS ( French National Research Centre for Science) and the INRIA ( French National Research Institute in Computer Science)
The ANRT (French National Agency in Research and Technology) is sponsoring the thesis of one of our research engineers with the collaboration of Active Asset Allocation and the University of NiceSophia Antipolis
Active Asset Allocation received the seal of approval of «Finance Innovation», a centre from Paris EUROPLACE, encouraging young firms to develop innovative techniques in finance and is incubated by Paris Incubateurs Finance
Active Asset Allocation is member of the French Institute of Actuaries
Active Asset Allocation is member of the ACIFTE ( Association of Financial Advisers and Analysts authorised by the AMF, the French regulator)
Active Asset Allocation has received the innovation award by the Entreprendre network
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Management TeamOlivier Hiezely
Founding Partner - Chairman
Olivier has completed a MBA with EDHEC in 2008.
He is an engineer with more than 20 years of professional experience in the field on organisation and information systems.
He has worked for 18 years at L’OREAL and developed an excellent understanding of the challenges and the strategies involved in a multinational company.
He has extensive experience in both people and projects management. Olivier has a strong personality focused on results. During his career, he developed a culture of excellence a nd pe r fo rmance , a l on g w i t h good interpersonal skills.
Adina Grigoriu
Founding Partner - CEO
Adina has an actuarial degree, is a member of the French Institute of Actuaries and has 15 years experience in different finance fields, including quantitative modelling.
An asset allocation specialist, she started her career as a derivatives trader. She then joined BNP Paribas Asset Management where she held several positions ranging from product manager to fund manager and head of ALM. She joined a spinoff of the EDHEC-Risk Institute in 2007 to develop the Dynamic Core Satellite approach and its application to institutional portfolios.
During her career, Adina has advised numerous asset managers and institutional clients on designing and managing multi-asset portfolios, including hedge funds.
Active Asset Allocation
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AACIF
KPMG
Apple MCS
Cabinet SimonFUI
Structure et Organisation
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Active Asset Allocation
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Equilibre
Maîtrise
Excellence
Respect
Intégrité
Our Values
Exigence
The Team
rely on academic research and put into practice the state-of-the-art of academia, design solutions to respond to specific client needs
portfolio insurance, long term guarantee, preservation of assets ( ex: pensions)
protect value, avoid excess of risk (in a downward or upward trend)
For those who trust us and those who will
Inno
vatio
n
Ant
icip
atio
n
SustainabilitySecurity
Responsibility
Trust
cultures, men - women, variety of backgrounds and horizons
adaptation to the environment and permanent reconsideration...withenthusiasm
individual reliability to serve the team, personal stability
software know-hows, mathematical calculus and modelling are internalexpertises
High
Sta
ndar
ds
DiversityExcellence
Respect
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Some of our valuable clients and partners
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Quelques conférences/séminaires dans lesquels nous avons présenté l’approche de gestion des risques
dynamique : exte
Conferences
Active Asset Allocation
October 2013, IPE 360, Noordwijk, Netherlands
June 2013, Factset Symposium, Monaco
June 2013, Infinity Conference 2013, Aix en Provence
April 2013, Assurfinance 2013, Paris
February 2013, Matinale Affo ( French Association of family offices), Paris
January 2013, Matinale EIFR, Paris
October 2012, APG «Academic Advisory Board» seminar, Amsterdam
October 2012, IPE 360, Windsor
June 2012, IPE 360, Paris
May 2012, Pitmans Trustees, London
April 2011, Opal Financial Group, Investment Consultants Forum Europe, De-Risking Solutions : Liability Driven Investments, London
December 2010, Collège Interdisciplinaire de la Finance, seminar Quantitative Behavioral Finance, Nice
October 2010, Generali Investments, Pan-European Institutional Clients Conference, Istanbul
May 2009, EDHEC-RISK, Edhec Institutional Days, Paris
December 2008, EDHEC-RISK, Edhec Alternative Investment Days, London
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Our Customised Solutions for the Institutional Investors and the Asset
Management Community
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Solutions
Active Asset Allocation Solutions Implementations
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Why ? (1)
Active Asset Allocation has developed a set of quantitative tools able to simulate asset behaviors in a stochastic environment allowing to design dynamic asset allocation solutions based on risk management
We use asset classes defined by the investor and the constraints he has to respect ( allocation min/max, risk limits, ...) as a working base
Our studies allow to define for instances :
the optimal mix between asset classes
the strategic benchmark
the fees structure
if the objectives are achievable, and if necessary the possible adjustments to make so that the objectives can be met
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Solutions
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Why? (1I)
The technology can be applied to different issues :
for an asset manager : design of a balanced fund, design of a diversified bond fund ( sovereign, corporate, EM, high yields, ...), design of an equity fund with draw-down constraints
for a foundation : preservation of endowments
for a pension fund : inclusion of liabilities and management of the asset/ liability balance
for target-date funds: the optimisation of the allocation depending on other parameters than the horizon in order to preserve part of the capital
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Solutions
Active Asset Allocation Solutions Implementations
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Our Solution to Manage the Assets: Dynamic Asset and Risk Management
( DARM)
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Solutions
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Limits of the diversification strategy
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The last 10 years have shown the limits of this approach :
10 years ago, an investor who wanted a performance of 7% would have chosen an allocation 60% equities, 40% bonds
The results of a diversified allocation depend on the hypotheses of returns, volatilities and correlations: they are often wrong!
Expe
cted
ann
ualiz
ed r
etur
ns
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0%
-4.5%
-2.5%
-0.5%
1.5%
3.5%
5.5%
7.5%
9.5%
1.5% 6.5% 11.5% 16.5% 21.5%
4.5%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0%
-4.5%
-2.5%
-0.5%
1.5%
3.5%
5.5%
7.5%
9.5%
1.5% 6.5% 11.5% 16.5% 21.5%
Annualized volatility Annualized volatility
Efficient frontier built on hypotheses at the end of 2001Efficient frontier calculated with 2001-2011 risks an returns
Solutions
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Limits of the tactical allocation
The tactical allocation aims to improve the performances of the diversified allocation under tracking error budget
The allocation is regularly readjusted depending on views on the futur returns of assets (asset manager convictions or forecasts of a quantitative model)
In any case, this implies relying on bets
Performances are very volatile, from a fund manager to another and from a year to another
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Solutions
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DARM Principles
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Our DARM (Dynamic Asset and Risk Management) solution is inspired from portfolio insurance techniques :
Division of the portfolio into two components : a component with low or less risk to protect the capital, and a component with more risk, which allows to capture the performance
We aim to protect a certain level of capital that we materialise with a Floor
But we have added important improvements :
possibility to invest simultaneously in all the asset classes the investor wants to include in the portfolio ( and not only in one risk-free asset and one risky asset)
Less risk of being fully invested into money market instruments (often the drawback of a CPPI)
Variable multiplier taking into account market risk changes
Management of several protection levels (floors)...
Our solution can dynamically control the negative returns of a portfolio in order to limit losses without limiting the performance
Solutions
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DARM solution: asset control
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Solutions
Characteristics of the DARM solution:
relies on risk management rules only
does not require return forecasts and does not rely on past risk/return
increase exposure to risky asset (Satellite) when it over performs Core & vice versa
generates accumulation of over performance = creation of cushion, i.e. greater exposure to Satellite
DARM Innovations :
Customised Model
Inclusion of several assets
Levels and types of floors
adapted
New source of performance
Portfolio
Cushion
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Solutions
0
375
750
1125
1500
Number of sim
ulated scenarios
-0,5 1 2,5 4 5,5 7 8,5 10 11,5 13 14,5
10-year annualized returns
Return distribution for DARM vs. Diversification
Diversification DARM
Stochastic universe
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Positioning of our DARM solution
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Traditional approach: diversification
Traditional approach: tactical allocation
Traditional approach: portfolio insurance
Risk Parity Approach Our approach: Dynamic allocation
Objective asset return asset return risk management risk management risk management
Risk Measurement volatility volatility capital loss volatility, DD, VaR capital loss
Asset Allocation Fixed allocation dynamic allocation given performance forecasts
Fixed allocation defined by the insurance portfolio approach
Dynamic allocation so as to have the same risk exposure within each asset class
Dynamic allocation between the core and the satellite depending on the margin of error
Benchmark cap weighted market indices cap weighted market indices - - -
Performance Measurement
overperformance compared to market indices absolute performance absolute performance absolute performance absolute performance
Risk Managementsymmetric tracking error compared to benchmark
symmetric tracking error compared to benchmark - - asymmetric tracking error
Cushion management - -once the cushion is consumed, there are no more options to perform
-the cushion is rebuilt by construction if consumed
Solutions
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Solutions
Our solution for Target-Date Funds:DARM Horizon
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Philosophy of Horizon Strategy
We adapted DARM (Dynamic Asset and Risk Management), our solution that allows investors to maximize their performance while taking into account their risk constraints, to the requirements of retirement savings. In an environment where bonds offer returns that are no longer attractive, the DARM Horizon is a response to growing demand for savings products exposed to risky assets, but with an efficient risk control. It offers an alternative to current models of de-risking, which principle is hazardous when the risk-free asset is no longer risk-free.
This solution relies on the utilization of several risk-controlled portfolios (DARMs), with different levels of risk. The capital is distributed among these portfolios by a desensitization that is no longer time-linked, but designed to progressively lock-in gains.
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Solutions
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Our strategy back-tested over a 15-year period
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DARM horizon historical allocation to each asset class
0
50
100
150
200
250
300
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
0 %
25 %
50 %
75 %
100 %
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012Equities Bonds Cash
Annualized Returns 7,8%Maximum Loss -10,8%
Performance of the strategy compared to the industry’s standard products in France
Annualized Returns 4,6%Maximum Loss -17,8%
DARM Horizon
Industry De-risking
Implementations
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Our solution for Investors with Liabilities:Dynamic Asset Liability Management
(DALM)
Solutions
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Solutions
The need of a new Asset Liability Management
On one hand, 2008 credit tsunami and market conditions ever since
On the other hand, the lack of appropriate goals for pension funds:
peers benchmarking instead of analysis of particular needs
target absolute return instead of liabilities as a benchmark
too much reliance on hypothesis and long term static allocation
short term margin for error not taken into account
... have completely changed the pensions landscape
Consequence: pension funds have witnessed a worsening in their funding ratios and are now concerned about being able to produce investment returns that are high enough to deliver their promises to members without jeopardising the financial health of the sponsor company in the process
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Traditional strategies in Asset/Liabilities Management
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Solutions
Most common approaches currently used:
Traditional LDI : takes the financial risks away by hedging the liabilities, BUT the funding gap is then only filled by contributions AND 100% funded situation might not be good enough given all the other risks that lay with the liabilities ( mortality, life expectancy, inflation, ...)
Long term fixed allocation based on risk and return expectations needs accurate forecasts over the investment horizon and is not compatible with short-term constraints; when proven wrong, they require higher and higher returns and can lead to virtually infinite contributions
Traditional De-risking : systematical switching from «growth» assets to «matching» assets when funding level improves on a «flight» plan to fully funded can be as bad as fixed allocation and can also lead to virtually infinite contributions
Our solution is more comprehensive than traditional de-risking: the dynamic allocation is ongoing
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DALM principlesOur Dynamic Asset and Liability Management solution is an extension of our DARM solution to the presence of liabilities
Again, the portfolio is divided into two components :
The Liability Hedging Portfolio (LHP), correlated to the liabilities
The Performance Seeking Portfolio (PSP), invested in riskier assets, structured following the DARM approach
Risk management is done through protecting a chosen level of funding ratio. The protection level can go up when the funding ratio improves
The investment in the PSP depends not only on risk-aversion & market conditions, but also on the margin for error (i.e. how far is the actual funding ratio from the funding ratio we are trying to protect)
De & Re Risking:
Short term and Medium/Long term De-Risking
Short term Re-Risking
Short term decisions are predefined and do not involve market forecasts
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Solutions
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Design methodology of Dynamic ALM
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Liabilities analysis
Statistical analysis Finding of
optimal parameters
Creation of building blocks
Generation of stochastic scenarios
Asset ClassesInterest rate curveLiabilities
Best stochastic match for the Liability Hedging Portfolio
Combine assets by pairs and find the best parameters to construct the PSP
Analysis of the distribution of the funding ratio, necessary contributions, surplus, expected return, volatility, max drawdown, etc...
Design of the DALM solution that best fits the pension fund liabilities stream and particular constraints, to ensure risk is properly managed no matter the scenario
Solutions
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Daily monitoring to ensure risk limits are not breached
Monthly rebalancing to ensure asset allocation is optimal given the funding status of the pension fund and its long term goal
Exceptional rebalancing if half of the risk budget has been used intra-month
De & Re Risking features:
Short and medium/long term De-Risking: in the short term, the allocation to the risky asset goes down as the funding ratio approaches the protection floor; in the medium/long term, protection floor moves upward as scheme funding level rises, helping to reduce probability that market gains and/or contributions are «squandered» by falling markets
Short term Re-Risking: when the funding ratio moves away from the protection floor, the allocation to the risky asset goes up
Short-term decisions are based on formula and do not involve market predictions
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Strengths of our DALM solution
Solutions
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Positioning of our DALM solution
Traditional approach: focus on assets
De-Risking strategy depending on a glide path
Our solution: funding ratio management, focus on
liabilities and their correlation with the assets
Objective asset return wealth level funding ratio management
Risk Measurement asset volatilityasset volatility and funding
ratio levelfunding ratio volatility (assets vs
liabilities)
Asset Allocation long term fixed asset allocationfixed allocation (ALM study) adjusted
with de-risking as funding level thresholds are reached
dynamic allocation between the core portfolio and the
performance driven portfolio depending on the level of the
funding ratio
Benchmark cap weighted market indices cap weighted market indices liabilities
Performance Measurement over-performance compared to the benchmark
over-performance compared to the benchmark
liabilities + x%
Portfolio Monitoring quarterly, update of the asset allocation every one to three years
on-going monitoring of the funding ratio, but de-
risking depending on the glide path
on-going monitoring of the funding ratio to de-
risk and re-risk
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Solutions
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What you should remember from our solutionsThe Dynamic Asset and Risk Management (DARM) solution allows to take into account investors issues (capital preservation, regulation, ...) by redefining risk while respecting their constraints (going beyond volatility, VAR, ...)
The DARM approach, inspired from portfolio insurance techniques, is an asset allocation strategy which offers an interesting alternative to the fixed allocation based on past data and to the tactical allocation based on forecasts
Its extension to ALM (Dynamic Asset Liability Management) allows to manage the funding ratio volatility and to minimise needed contributions
our experience with US pension funds shows a 30% (up to 50%) reduction in contributions over 10 years compared to other widespread approaches (traditional LDI, fixed allocation, de-risking)
our results with French foundations and pension funds are much better than the results achieved by other asset allocation strategies
Its extension to Target-Date Funds (DARM Horizon) allows to offer an alternative to current models of de-risking, which principle is hazardous when the risk-free asset is no longer risk-free.
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Active Asset Allocation Solutions Implementations
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Design of a dynamic risk management approach for a bond fund investing in international credit instruments and for a diversified fund
Creation and implementation of a dynamic risk management solution for a fund of ISR funds (DARM)
Analysis of the strategic asset allocation of a Dutch pension fund
Creation of a dynamic risk management approach (DARM Horizon) for a DC pension scheme with different risk profiles
Creation and implementation of a dynamic ALM (DALM) for the US pension fund of a FTSE 100 company
Creation and implementation of a dynamic risk management approach for two French foundations
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Examples of past missions and ongoing work
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Notre DifférenceOur differenceWe qualify risk management parameters by adapting them to the strategy of each single investor and in accordance with regulation
We determine the risk budget that will be used precisely to protect capital and capture performance. We communicate to the investment comittee an action plan for unexpected situations
We determine ex-ante the signals (for instances the alert thresholds or the opportunity levels) that allow to take relevant and efficient asset allocation decisions between a «core» and «satellites»
We capture, register and calculate the very numerous data needed for the simulations and studies that will indicate the best asset allocation options after a qualitative analysis of the results. Our strong investment experience is a major advantage while interprating the results of our models
We design and implement complex models in accordance with the state-of-the-art of asset allocation techniques. Such models are created in the best possible conditions of reliability, solidity and efficiency. They are improved constantly thanks to our internal research, which provides clients with continuous progress
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Active Asset Allocation
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420 Million Euros advised and monitored daily
35% of ressources affected to research, development and innovation
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Key figures
Active Asset Allocation
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