The effect of absolute return strategies on risk-factor diversification and portfolio performance
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Author(s)Richard CloutierLink to ORCID Index: https://orcid.org/0000-0001-5780-3304
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Alan C. MikkelsonLink to ORCID Index: https://orcid.org/0000-0003-4076-8412
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DOIhttp://dx.doi.org/10.21511/imfi.20(3).2023.08
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Article InfoVolume 20 2023, Issue #3, pp. 91-101
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Creative Commons Attribution 4.0 International License
Absolute return strategies attempt to generate positive returns that are uncorrelated with equity or bond markets and can be used to increase diversification and performance within multi-asset class portfolios. The current paper compared diversification and portfolio performance between traditional multi-asset class portfolios and multi-asset class portfolios with the addition of absolute return strategies. Using closing prices from January 1, 2000 – June 30, 2018, this paper back-tested two multi-asset class portfolios, one composed of equities, fixed income securities, and real return strategies, and the other portfolio composed of the same asset classes but with the addition of absolute return strategies. In particular, the absolute return strategies that this paper added were equity market neutral strategies, managed futures, and global macro strategies. Results indicated that the use of absolute return strategies improved diversification by increasing the portfolio’s effective number of bets (ENB) and enhanced risk adjusted returns as measured by improved Sharpe ratios, Treynor ratios, Jensen’s Alphas, and Sortino ratios. In addition, results showed that the benefits of adding absolute return strategies accrued throughout a full market cycle, which included declines and advances. These results support previous research on the individual absolute return strategies and demonstrate that the portfolio performance and investor wealth can be improved with the addition of these absolute return strategies to multi-asset class portfolios.
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JEL Classification (Paper profile tab)C12, G10, G11, G19, G23
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References37
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Tables5
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Figures0
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- Table 1. Correlation matrix of common equity asset classes from January 2000 – June 2018
- Table 2. Correlation matrix of global bond, equity market neutral, global macro, managed futures, and global stock, asset classes from January 2010 to June 2018
- Table 3. Change in portfolio ENB due to absolute return strategies
- Table 4. Annual Sharpe ratio, Treynor ratio, Jensen’s Alpha and Sortino ratio of the two portfolios
- Table 5. Overall difference in the performance statistics
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