Improving portfolio efficiency with multi-asset absolute return strategies

Most institutional investors are searching for strategies to improve risk-adjusted returns (Sharpe ratio) without sacrificing return. Two approaches dominate: pursuing a portfolio’s desired rate of return with less volatility or seeking to increase returns without a significant boost in volatility. Investors have in recent years made progress towards these goals by refining the optimal asset allocation mix.

We believe a more powerful tool for further improvement comes from adding a new layer of diversification with absolute return strategies. In our investment research and practice, we find that absolute return strategies, which we define as unconstrained, benchmark-agnostic strategies that focus on more efficient returns with less systematic risk (beta), can help improve the overall efficiency of an investment plan.

Recent studies, by contrast, demonstrate a reliance on traditional asset classes. A Towers Watson study, analysing the 2012 asset allocations of 556 Fortune 1000 US pension plans, revealed a focus on traditional asset classes. Though there is a small allocation to alternative asset classes, such as REITs, private equity and hedge funds, the vast majority of the allocation consists of stocks and bonds.

Read the full white paper at the link beneath Related Files.

Supporting documents

Click link to download and view these files