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Improving performance for long-term investors: wide diversification, leverage, and overlay strategies

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  • John M. Mulvey
  • Cenk Ural
  • Zhuojuan Zhang

Abstract

Long-term investors can markedly improve their investment performance by incorporating specialized 'overlay' securities/strategies in conjunction with widely diversified and leveraged multi-stage portfolios. The overlays require no dedicated capital beyond the core portfolio, providing higher risk-adjusted portfolio returns than approaches based on traditional leverage. A primary example involves the futures market for commodities, currencies and fixed income. These liquid markets display novel patterns of returns relative to traditional equity/bond asset categories. We measure benefits via back tests with several fixed-mix rules, as well as within a stochastic program.

Suggested Citation

  • John M. Mulvey & Cenk Ural & Zhuojuan Zhang, 2007. "Improving performance for long-term investors: wide diversification, leverage, and overlay strategies," Quantitative Finance, Taylor & Francis Journals, vol. 7(2), pages 175-187.
    • Handle: RePEc:taf:quantf:v:7:y:2007:i:2:p:175-187
    DOI: 10.1080/14697680701198028
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    References listed on IDEAS

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    1. Ziemba,William T. & Mulvey,John M. (ed.), 1998. "Worldwide Asset and Liability Modeling," Cambridge Books, Cambridge University Press, number 9780521571876, September.
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    Cited by:

    1. Ravi Kashyap, 2024. "The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol," Papers 2405.02302, arXiv.org, revised Jul 2024.
    2. M. A. H. Dempster & E. A. Germano & M. Medova & M. I. Rietbergen & F. Sandrini & M. Scrowston & N. Zhang, 2007. "DC pension fund benchmarking with fixed-mix portfolio optimization," Quantitative Finance, Taylor & Francis Journals, vol. 7(4), pages 365-370.
    3. Keith Cuthbertson & Simon Hayley & Nick Motson & Dirk Nitzsche, 2016. "What Does Rebalancing Really Achieve?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 21(3), pages 224-240, July.
    4. Sebastiano Vitali & Vittorio Moriggia & Miloš Kopa, 2017. "Optimal pension fund composition for an Italian private pension plan sponsor," Computational Management Science, Springer, vol. 14(1), pages 135-160, January.
    5. Sebastiano Vitali & Vittorio Moriggia, 2021. "Pension fund management with investment certificates and stochastic dominance," Annals of Operations Research, Springer, vol. 299(1), pages 273-292, April.
    6. Ravi Kashyap, 2024. "The Blockchain Risk Parity Line: Moving From The Efficient Frontier To The Final Frontier Of Investments," Papers 2407.09536, arXiv.org.
    7. Moriggia, Vittorio & Kopa, Miloš & Vitali, Sebastiano, 2019. "Pension fund management with hedging derivatives, stochastic dominance and nodal contamination," Omega, Elsevier, vol. 87(C), pages 127-141.
    8. John M Mulvey & Woo Chang Kim & Yi Ma, 2010. "Duration-enhancing overlay strategies for defined benefit pension plans," Journal of Asset Management, Palgrave Macmillan, vol. 11(2), pages 136-162, June.

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