An Alpha+Beta Framework
| Nov 16th, 2006 | Filed under: Portable Alpha & Alpha/Beta Separation | By: Alpha Male |
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By: Edward Kung, Babson Capital & Larry Pohlman, Wellington Management Company
Published:á=Winter 2005, Journal of Investing
This article provides a ringing indictment of strategic asset allocation (SAA). The authors argue that an Á-°Alpha BetaÁ-? solution is far superior to a simple allocation to stocks/bonds/cash and sub-allocations to various equity classes.
Á-°A policy portfolio needs to meet all of these objectives [short & long term liabilities, growth, risk budgeting, out performance] within a single, traditional alpha and beta Á-?bundledÁ-? product structure is inefficient if not inappropriate.Á-?
Essentially, Kung and Pohlman say that SAA falls short on six fronts:
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- Á-°The alpha and beta decisions are tangled when implementing an asset allocation.
- Á-°Alpha selections are constrained and become a byproduct of asset allocation decisions.
- Á-°Investors may be inefficiently obtaining alpha through the traditional alpha and beta bundled product structure.
- Á-°Various constraints, such as the inability to short positions, in the traditional asset allocation process make it difficult for investors to efficiently allocate and utilize a risk budget.
- Á-°A traditional 60/40, 50/50, or 30/70 asset mix benchmark may not realistically represent a planÁ-?s liabilityÁ-¬
- Á-°Pension plans and endowments and foundations using traditional asset allocation may be inefficient in managing their investment fee structure.Á-?
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