Evaluating Multi-Asset Strategies
- K. Stuart Peskin
- Journal of Portfolio Management, special issue
- A version of this paper can be found here
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What are the research questions?
- Is there ‘ONE’ correct way to evaluate multi-asset strategies?
- Which are the most appropriate metrics to evaluate multi-asset strategies?
What are the Academic Insights?
By using a case-study approach, the author suggests the following:
- NO- There is no ‘ONE’ correct way to evaluate the performance of a multi-asset portfolio. A range of measures is preferred. And by the way, correlation can be a misleading metric, if viewed in isolation.
- The author proposes different metrics based on both historical and predictive techniques.
- Tail behavior to provide critical information of the strategy results during period of market turbulence ( including a comparison to what correlations would have predicted)
- Upside versus downside participation to observe the degree of market capture
- Attribution by asset class, for example, how much of the return was captured by equities
- Risk modeling, for instance by using an APT risk model (intro to these models here)
- Ex-ante tail behavior, the evaluation of portfolio under never-seen-before turbulence
Why does it matter?
This case study is a nice example of a complementary analysis to better understand multi-asset strategy and their potential role in a portfolio.
The Most Important Chart from the Paper:
An increasing number of investors are recognizing the many benefits of a multi-asset approach, including the potential for improved diversity, greater liquidity, and reduced volatility. Also advantageous is their ability to fit readily alongside a variety of investment approaches and asset class categories. That said, multi-asset strategies come with challenges. This article addresses a particularly problematic area—how to evaluate multi-asset strategy outcomes. Relying on only one or two measures for evaluation can lead to misinterpretation of the historical investment results achieved. Instead, the author advises using a variety of evaluation techniques. One of these—correlation—is discussed in depth, because the author believes it is misunderstood in many dimensions of multi-asset investing. The author also examines some of the more useful performance and risk analytics, both historical and predictive, that can help to understand what drives multi-asset investment outcomes.
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