@article {Alford49, author = {Andrew Alford and Robert C Jones and Kurt D Winkelmann}, title = {A Spectrum Approach to Active Risk Budgeting}, volume = {30}, number = {1}, pages = {49--60}, year = {2003}, doi = {10.3905/jpm.2003.319919}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Many institutional investors use a barbell strategy to invest their large-cap equity portfolios. This strategy mixes passive managers (who have no tracking error) with traditional concentrated active managers (who usually have high tracking errors) to moderate the total portfolio{\textquoteright}s active risk. The authors believe investors can achieve better results by including in the mix low-tracking error structured managers (also known as enhanced-index or benchmark-sensitive managers). They call this approach the spectrum strategy, because it allocates risk across the entire active risk spectrum. The historical analysis shows structured managers have generally achieved higher risk-adjusted returns (i.e., information ratios) than traditional managers. Their relative performance advantage is due to, first, structured managers{\textquoteright} focus on risk management (i.e., less noise in the information ratio{\textquoteright}s denominator), and second, their relative freedom from the no-short constraint (i.e., the no-short constraint is less binding when managers target small active deviations). Perhaps surprisingly, given the expected information ratio advantage, allocations to structured managers should come primarily from the plan{\textquoteright}s passive allocation rather than from traditional active managers.}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/30/1/49}, eprint = {https://jpm.pm-research.com/content/30/1/49.full.pdf}, journal = {The Journal of Portfolio Management} }