Portfolio Optimization vs. Risk Budgeting: Which One To Chose
Should you apply portfolio optimization or risk budgeting techniques when constructing a portfolio of hedge funds? Join our webinar to find out.
Risk budgeting involves analyzing risk-return contributions of portfolio underlying assets, or funds of a Fund of Funds, and then adjusting their allocation weights to enhance portfolio performance. Enhancing portfolio performance doesn't necessarily mean maximizing its returns, but could involve various risk-return statistics, for example, portfolio diversification or tail risks. Presenting two different concepts in portfolio management, risk budgeting and portfolio optimization translate to the same task of portfolio optimization, though the objective function and constraints are totally different. Risk budgeting, when applied to hedge fund portfolios and fund of funds, inherits the same unique hedge funds problems like non-normal distributions of returns or inapplicability of the mean-variance framework.
This tutorial discusses the risk budgeting and portfolio optimization techniques from the practitioner's point of view: which one would yield the best results when constructing a portfolio of hedge funds or a multi-asset portfolio.
Comparing Risk Budgeting Models For Fund of Funds
- Standard Deviation Equal Risk Contribution (ERC).
- Conditional Value-at-Risk (CVaR) Equal Risk Contribution
- Global Minimum Variance Portfolio (GMV)
- Most Diversified Portfolio (MDP)
- Minimum Tail Dependent Portfolio (MTP)
- Maximum STARR (Stable Tail Adjusted Return Ratio) Portfolio
- Maximum Sharpe Ratio Portfolio
Risk Budgeting vs. Portfolio Optimization For Hedge Fund Practitioners - Step-by-step Tutorial
- Risk Budgeting Software: Risk Shell tools, controls and options.
- Portfolio Optimization Software: Risk Shell tools, controls and options.
- Portfolio backtesting techniques for selecting the best strategy for portfolio allocations.
Institutional portfolio managers, hedge fund investors, hedge FoF and multi-asset portfolio managers, risk managers, CIOs, advanced family offices.