A Disciplined Approach to Market-Neutral Investing
Volatility Harvesting with Hedged Market Exposure
- Seeks to take advantage of volatility through systematic rebalancing across U.S. and international stocks, commodities, and currencies
- Seeks to create a market-neutral portfolio with lower volatility, lower downside risk, and lower correlation to traditional asset classes
Portfolio Construction
- Rules-based investing via target portfolio weights and rebalancing bands
Implementation Management
- Seeks to take advantage of volatility through systematic rebalancing across U.S. and international stocks, commodities, and currencies
Observations & Process
| 1. Avoid Concentration | 2. Systematic Rebalancing | 3. Reduce Frictional Costs |
|---|---|---|
| Create target weights that avoid concentration risk. | As concentrations build up, rebalance. | Trade efficiently, reflecting the unique nature of each of the asset classes. |
| − Target weights are calculated using a mathematical rule that attempts to avoid concentrations present in many benchmarks. − The global stock portfolio underweights the largest countries, sectors, and stocks in a broad portfolio that is less volatile than the overall market. − The commodity and currency portfolios seek to provide broad exposure across commodity sectors and developed market currencies. − Short positions are established against the benchmarks to neutralize the beta exposure. | − The amount of "rebalancing alpha" depends on the correlation and volatility of the underlying assets. − Rebalancing seeks to take advantage of the observed volatility of stocks, commodities, and currencies by systematically selling when prices go up and buying when they go down. − Low correlations between securities and asset classes increases potential rebalancing opportunities. | − Rebalancing bands are established to avoid excessive trading costs. − Uses derivative securities to access commodity and currency markets, gain short equity exposures, and reduce transaction costs in the physical securities. |
