Asset Management: Advanced Investments

The following notes come from the course Asset Management: Advanced Investments, taught at University of Zurich (UZH) by Professors Thorsten Hens and Alexandre Ziegler.

Feel free to reach out to me for any comment, clarification or mistake.

Index

• Introduction
• Economic Foundations

Introduction

Asset management is about investing into assets in order to achieve certain goals given some restrictions.

Wealth management determines the goals and restrictions.

Risk management makes sure the restrictions are satisfied.

Practical Procedures

• SAA (Strategic Asset Allocation): allocation to asset classes that should be followed in the long term. Different approaches possible:
  • Mean-Variance analysis
  • Mean-downside Risk analysis (Ortec), focusing on investment's expected return (the mean) relative to its potential losses, ignoring positive gains entirely.
• TAA (Tactical Asset Allocation): tactical deviations from SAA on short-period (monthly) basis. Different approaches possible:
  • Passive rebalancing on event-driven or time frequency basis
  • Quantitative Analysis (fundamental monetary macro (FMM) view)
  • Quantative Analysis based on regression
  • Rank-based
• IAA (Is Asset Allocation): implementation of TAA with investments
• Hedging: overlay of SAA to satisfy restrictions and risk constraints.
  • FX-hedging: the standarda rule says:
    • hedge nominal assets
    • partially hedge real assets.
    • example: tipically, FX-hedging for CHF investor reduces volatility by keeping mean
  • Tail-Risk Hedging: when you have asymetiric payoff function

However, note that different *AA have different explanatory powers in expected and observed returns:

• SAA explains 75% of oberved returns
• TAA 20%
• IAA 5%

Furthermore, note that they have different quantiative/qualitative approach: from SAA (the most qualitative), we have TAA, IAA and then pure trading (more quantitative).

Performance Measures

We define the arithmetic average of returns as:

in contrast, geometric average is:

TWR (time weighted return) measures the average return in the case of a fixed amount X over $t=1,\mathrm{2...}T$:

MWR (money weighted return, also defined as IRR, internal rate of return) in contrast measures the average return ain the case of variable amounts $X_t$t = 1,2...T$. It is computed by solving for the rate that solves: