Active Risk Budgeting: A Portfolio Construction Methodology for Futures Strategies

18 Pages Posted: 2 May 2019 Last revised: 15 May 2019

Date Written: February 1, 2019

Abstract

We present a portfolio construction methodology for futures strategies that incorporates active trading and also borrows salient features from the risk-parity methodology. We document the evolution of expected risk and return based portfolio construction methodologies and propose a new methodology which corrects the crucial assumption in risk parity that all investments have similar risk adjusted returns and improves on Grinold and Kahn’s position sizing methodology by using a optimization based framework. We demonstrate a baseline implementation of active risk budgeting that improves upon both mean variance optimization and risk budgeting and document the challenges associated with its implementation for futures trading.

Keywords: Portfolio Construction, Position Sizing, Managed Futures, Portfolio Optimization, Risk Budgeting, Risk Parity

JEL Classification: C00, C10, C45, C50, G00, G11

Suggested Citation

Chakravorty, Gaurav and Awasthi, Ankit and Srivastava, Sonam and gupta, sanchit and Singhal, Mansi, Active Risk Budgeting: A Portfolio Construction Methodology for Futures Strategies (February 1, 2019). Available at SSRN: https://ssrn.com/abstract=3376062 or http://dx.doi.org/10.2139/ssrn.3376062

Gaurav Chakravorty (Contact Author)

Qplum ( email )

Harborside 5, 185 Hudson St, Suite 1620
Jersey City, NJ 07311
United States
2013772302 (Phone)

HOME PAGE: http://https://www.qplum.co

Ankit Awasthi

affiliation not provided to SSRN

Sonam Srivastava

Wright Research ( email )

Mumbai, 400098
India

Sanchit Gupta

Qplum ( email )

Harborside 5, 185 Hudson St, Suite 1620
Jersey City, NJ 07311
United States
2013772302 (Phone)

HOME PAGE: http://www.qplum.co

Mansi Singhal

Qplum ( email )

Harborside 5, 185 Hudson St, Suite 1620
Jersey City, NJ 07311
United States
2013772302 (Phone)

HOME PAGE: http://www.qplum.co

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