Optimal Holdings of Active, Passive and Smart Beta Strategies

29 Pages Posted: 19 Jun 2017 Last revised: 22 Jan 2018

See all articles by Edmund Bellord

Edmund Bellord

Quantitative Management Associates (QMA) LLC

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Dan Porter

Quantitative Management Associates, LLC

Martin Tarlie

GMO

Date Written: January 18, 2018

Abstract

The growing dominance of the core and explore model – a large passive index combined with a collection of high tracking error satellite portfolios – in conjunction with the growth of factor investing has renewed interest in how to allocate among different equity strategies. We study this problem from an expected shortfall perspective and find that portfolios that minimize expected shortfall differ substantially from portfolios generated using conventional methods.

Keywords: Portfolio Management, Smart Beta, Factor Investing, Passive Index, Enhanced Index, Factor Allocation, Asset Allocation, Modern Portfolio Theory, Mean Variance, Tracking Error, Shortfall, Optimization

JEL Classification: G11

Suggested Citation

Bellord, Edmund and Livnat, Joshua and Porter, Dan and Tarlie, Martin, Optimal Holdings of Active, Passive and Smart Beta Strategies (January 18, 2018). Available at SSRN: https://ssrn.com/abstract=2987924 or http://dx.doi.org/10.2139/ssrn.2987924

Edmund Bellord

Quantitative Management Associates (QMA) LLC ( email )

100 Mulberry Street
Gateway Center 2
Newark, NJ 07102
United States

Joshua Livnat

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Dan Porter

Quantitative Management Associates, LLC ( email )

100 Mulberry Street
Gateway Center 2
Newark, NJ 07102
United States

Martin Tarlie (Contact Author)

GMO ( email )

United States
617-790-5072 (Phone)

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