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Decentralized strategic asset allocation with global constraints

Author

Listed:
  • Minho Lee

    (Canada Pension Plan Investment Board
    University of Toronto)

  • Roy H. Kwon

    (University of Toronto)

  • Chi-Guhn Lee

    (University of Toronto)

  • Hassan Anis

    (University of Toronto)

Abstract

Decentralized investment management can be defined as the practice of having multiple managers implement investment strategies across different asset categories. It has been common practice due the presence of alternative investments or other asset classes which require high levels of specialization. However, it suffers from limited control of total fund characteristics such as total return, risk and liquidity. We model the investment process as an optimization problem in which we seek to maximize the flexibility for individual managers, while satisfying a set of desired long-term total portfolio characteristics of the fund. This process will allow firms to enable decentralized investment decisions without sacrificing the performance at the total fund level. The proposed optimization problem has a potentially large number of constraints, limiting the number of strategies below a practical level. We suggest a procedure to reduce the number of constraints before calling the optimization and include numerical results that support the effectiveness of the procedure. Also, investigated in this paper is the robust version of the proposed optimization.

Suggested Citation

  • Minho Lee & Roy H. Kwon & Chi-Guhn Lee & Hassan Anis, 2018. "Decentralized strategic asset allocation with global constraints," Journal of Asset Management, Palgrave Macmillan, vol. 19(1), pages 13-26, January.
    • Handle: RePEc:pal:assmgt:v:19:y:2018:i:1:d:10.1057_s41260-017-0057-4
    DOI: 10.1057/s41260-017-0057-4
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    References listed on IDEAS

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