Flexible Indeterminate Factor-Based Asset Allocation

Abstract

Asset allocation represents a fundamental strategic decision for every institutional investor. Although many asset allocation approaches have been recommended and implemented in various forms, each has its own strengths and weaknesses. A careful review of current asset allocation frameworks motivated the authors to design a hybrid approach that addresses many of these perceived individual shortcomings. The authors’ guiding principle was to use several familiar elements to create a flexible process that incorporates lessquantifiable investment ideas around a rigorous foundation. The result, which they call flexible indeterminate factor-based asset allocation (FIFAA), is an adaptive four-step asset allocation synthesis that remains quantitatively and theoretically well grounded. To achieve this goal, FIFAA overlays informed judgment about investment opportunities onto an objectively derived set of core factor exposures. TOPICS:Portfolio management/multi-asset allocation, factor-based models, portfolio theory

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