Risk Management in a Multi-Strategy Framework

Posted: 4 Nov 2005 Last revised: 27 May 2015

See all articles by Pranay Gupta

Pranay Gupta

Allocationmetrics Limited

Sven R. Skallsjö

Independent

Alice Krol

University of Groningen

Date Written: October 10, 2005

Abstract

Conventional methods of asset allocation employ a mean variance framework for allocating assets across asset classes, with the assumption of a symmetrical normal distribution of returns. However, in the context of multiple active strategies such as multi-strategy funds or fund-of-funds, three main differences arise, which necessitate an alternate allocation framework. First, it is the basic intention of active strategies to achieve non-normal positively skewed return distributions. Second, there is a very specific target return requirement, which needs to be accounted for in the selection and allocation to strategies. Finally, the objective of multi-strategy funds, to achieve excess return in any macro environment, any market environment and be relatively insulated during stress events, needs to be specifically incorporated in a strategy allocation process. This paper proposes a methodology for strategy allocation for a multi-strategy fund, which incorporates all these facets into a unified framework. We demonstrate how the allocation to strategies is an additional lever in a multi-strategy fund which enables the fund manager to maximize his probability of reaching a desired return target while managing the above aspects of multi-dimensional risk.

Keywords: omega, allocation, multi-strategy, higher moments

JEL Classification: G11

Suggested Citation

Gupta, Pranay and Skallsjö, Sven R. and Krol, Alice, Risk Management in a Multi-Strategy Framework (October 10, 2005). Available at SSRN: https://ssrn.com/abstract=835244 or http://dx.doi.org/10.2139/ssrn.835244

Pranay Gupta (Contact Author)

Allocationmetrics Limited ( email )

1008 Prosperity Millennia Plaza
663 Kings Road, Quarry Bay
Hong Kong, 00000
Hong Kong
852 6778 0258 (Phone)

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

Sven R. Skallsjö

Independent ( email )

No Address Available

Alice Krol

University of Groningen ( email )

P.O. Box 800
9700 AV Groningen, Groningen 9700 AV
Netherlands

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