Global Chief Investment

In recent years we have witnessed several new trends in asset allocation. The emphasis on liabilities has increased, the number of asset classes has risen significantly and there has been an increased willingness to invest in illiquid asset classes. The focus on the return distribution has increased as well and underpins the interest in hedge funds, alternative beta and investments with a convex return pay-off. The growth of derivatives has boosted the trend towards the separation of alpha and beta: an asset class is now held because of its risk premium and an actively managed portfolio of idiosyncratic risk is held for the alpha or excess return it can procure in the hands of a skilled manager. The complexity of these developments has given rise to the growth of fiduciary management. In terms of tactical asset allocation, the interest in quantitative approaches to expected return modelling continues to rise, underpinned by an effort to reduce the influence of psychological factors and to increase the number of de-correlated positions (breadth) whereby the returns of pair trades are easier to model compared to using a qualitative approach. Despite all these developments, the basic challenges of the simple, old-fashioned asset allocation are as high as ever. They concern the need to estimate the expected return vector of the asset classes over short and long horizons, to calculate the correlation structure and to anticipate its evolution and to find a way of dealing with fluctuations in risk aversion and possibly illiquid markets