A pre-requisite for constructing any great portfolio is identifying skilled managers that an investor believes can consistently generate alpha. Although investors intuitively recognize the value of alpha, they have historically lacked the tools required to build portfolios that include active managers. ActiveAllocator addresses newer challenges by designing a rigorous, integrated and, perhaps most importantly, practical framework for active investing. Extensive testing provides evidence that our framework can significantly improve upon more traditional portfolio construction methods. Our approach is unique in that it:
- More accurately measures manager alpha and beta on historical basis.
- Explicitly forecasts manager performance by combining historical data with other information.
- Quantifies unique risks of active managers.
- Accounts for these unique risks when constructing portfolios.
While the details of this approach are outside the scope of this note we summarize the general characteristics of alternative investments here.