Sunday, December 18, 2011

On Diversification & Active vs. Passive Management

In our work and research related to portfolio optimization, asset allocation and quantitative investment strategies, we use historical data and seek to maximize “forward information.” Our goal is to improve risk-adjusted returns and achieve prudent diversification.

In a recent article on Managed Futures and Commodities, we reviewed the performance of several asset classes during 2011 (through the end of November). Some investors noticed that the actual performance of some key asset classes outperformed professionally-managed funds. For instance, the S&P 500 is actually positive (+1%) as of the end of November, beating many actively-managed funds. In addition, because the S&P 500 was positive – along with government bonds (intermediate-term government bonds are +8% through November) – some investors are surprised to see Global Macro approaches down for the year.

Active versus Passive Management

Based on the performance of the S&P 500 and government bonds so far in 2011, we can see that a simple 60% stock / 40% bond mix would have eked out a small, but positive return, through the end of November. Why, then, are Global Macro, as well as many stock funds – and so many hedge fund categories, down for the year?

Professional portfolio managers are paid to manage risk. In the case of the stock market, we have seen very large swings – and money managers need to protect their clients and portfolios from large declines. In 2011 alone, the S&P 500 had at least five declines of 100 S&P points, or relatively large declines of about -7.5%. These declines took place in March, May, August, October and November. The August decline totaled about 200 S&P points, or about a -15% decline.

Read more here:
http://seekingalpha.com/article/314209-diversification-active-vs-passive-management

Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He is a specialist in quantitative investment strategies, managed futures, alternative assets, global macro & strategic asset allocation. Carlton combines a CTA hedge fund background with portfolio optimization work for institutional investors. 

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