Developing an Effective Dynamic Beta Overlay

14 Pages Posted: 26 Sep 2018 Last revised: 7 Oct 2018

See all articles by Joy Xu

Joy Xu

Verizon Investment Management Corp (VIMCO)

Arun Muralidhar

AlphaEngine Global Investment Solutions; George Washington University

Date Written: September 6, 2018

Abstract

Many institutions – both multi-asset managers and asset owners – have developed Global Tactical Asset Allocation (GTAA) strategies. These strategies could be either long-only or long-short, but are typically fully funded. In an environment where the future expectations of asset and portfolio returns are low, and cash is valuable for pension funds that are often paying more in benefits than they receive in contributions, asset owners need to be creative and re-purpose certain strategies. Many of these GTAA strategies trade assets that are not in the client’s Strategic Asset Allocation (SAA) and GTAA strategies could potentially be adding to total fund risk to the extent they take bets similar to those embedded in the SAA. This paper is an adapted case study to demonstrate how an innovative asset owner that had crowdsourced best ideas from strategic partners to create their own unique GTAA, was able to adapt the GTAA model into a futures-based Dynamic Beta/SMART Rebalancing overlay to not only improve the Sharpe ratio, but also greatly enhance the risk management properties of the overall fund. More importantly, cash utilization was improved because futures overlays need only be financed with limited cash if designed appropriately.

Keywords: Global Tactical Asset Allocation, GTAA, Multi-Asset Investing, Crowdsourcing Best Ideas, InvestTech, Futures Overlay, Effective Cash Management, Untapped Alpha, SMART Rebalancing, Investment Decision Process, Dynamic Beta, AlphaEngine®

JEL Classification: D11, D12

Suggested Citation

Xu, Zhuoying (Joy) and Muralidhar, Arun, Developing an Effective Dynamic Beta Overlay (September 6, 2018). Available at SSRN: https://ssrn.com/abstract=3245440 or http://dx.doi.org/10.2139/ssrn.3245440

Zhuoying (Joy) Xu

Verizon Investment Management Corp (VIMCO) ( email )

Basking Ridge, NJ
United States

Arun Muralidhar (Contact Author)

AlphaEngine Global Investment Solutions ( email )

Great Falls, VA
United States

HOME PAGE: http://www.mcubeit.com

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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