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Alternative Market Briefing

How active risk-based allocation can save your bacon

Tuesday, January 14, 2014

Cédric Baron
Benedicte Gravrand, Opalesque Geneva:

Among the ways a plain vanilla fund can eschew the great ups and downs of the markets – and deliver absolute returns - is a strategy with the long name of "active risk-based allocation."

Cédric Baron, manager of the ARMA funds at Lyxor Asset Management, shares on Opalesque Radio how the strategy can do that. (ARMA stands for "absolute return multi assets" and there are two funds in the ARMA range, ARMA and ARMA 8, both using the same investment process with different level of target volatility. ARMA posted a 3.26% return with 2.6% volatility and ARMA 8 recorded a 9.38% performance with 7.5% volatility.)

Active risk-based allocation is an allocation process based on the risk balance methodology, he tells Sona Blessing during the broadcast.

"Most of the time, when you try to make an allocation, you think in terms of nominal weight and you decide what percentage of your portfolio you will invest in any one single asset," he explains.

"With the risk based allocation, (instead) we think in terms of risk distribution. We set a risk budget to each asset class or to each asset we invest in, and we determine what weight we have to invest so that each risk contribution of each asset in the portfolio will be equalized. The aim of such allocation is to have a portfolio ......................

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