RT Journal Article
SR Electronic
T1 Fund of Funds, Portable Alpha, and Portfolio Optimization
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 79
OP 92
DO 10.3905/JPM.2009.35.3.079
VO 35
IS 3
A1 Peng Chen
A1 George J Jiang
A1 Kevin X Zhu
YR 2009
UL https://pm-research.com/content/35/3/79.abstract
AB The authors examine the portfolio optimization problem that arises when a manager's mandate is a fund of funds with an asset allocation benchmark. The portfolio manager's objective is to maximize the portfolio excess return over the benchmark subject to given tracking errors. The authors decompose total tracking error into two components—the deviation from the benchmark and the additional risk factors associated with fund alpha. By quantifying the contribution of each component of portfolio excess return, the authors show that the performance of the style-constrained portfolio is determined by the active alpha–seeking skill of the portfolio manager and that fund alphas can be separated from their style loadings and are portable. These findings will not only help investors determine optimal tracking error constraints, but will also provide a framework for portfolio managers to identify funds with certain characteristics in order to achieve an optimal portfolio return.TOPICS: Manager selection, statistical methods, VAR and use of alternative risk measures of trading risk