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Bridging the gap: Adding factors to passive and active allocations

categories: Indexes, Americas, EMEAI, Asset Allocation and Asset Liability Management, Factor and Risk Modeling, Investing (Investment Management), Portfolio Construction and Optimization, Risk Management, Asia Pacific, Asset Owners, Hedge Funds, Equities, Research Paper, MELAS Dimitris, AYLUR SUBRAMANIAN Raman, RAO Anil, Asset Managers (Quant or Fundamental), general

Asset owners face a challenge in determining how the factor allocation fits into the overall equity program, in particular how the factor allocation relates to the existing roster of active managers. This paper uses a risk budgeting framework to investigate how active mandates and factor allocations can be combined. We address three key questions: 1) how does the level of active risk in active management affect the factor allocation decision, 2) what share of the portfolio can be deployed to the factor allocation and 3) what are the implications of a top-down versus a bottom-up factor allocation.

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