In a new study entitled “Capturing the Market, Value, or Momentum Premium with Downside Risk Control: Dynamic Allocation Strategies with Exchange-Traded Funds”, produced as part of the Amundi ETF research chair on “Core-Satellite and ETF Investment,” EDHEC-Risk Institute researchers have analysed the performance of risk-controlled dynamic asset allocation strategies and concluded that appropriate implementation of the Dynamic Core-Satellite approach can boost portfolio returns while keeping downside risk under control.
Dynamic risk budgeting methodologies such as Dynamic Core-Satellite strategies are used to provide risk-controlled exposure to different asset classes. There is extensive evidence that investment strategies based on momentum and value are attractive for portfolio managers who seek outperformance. Momentum and value are among the most robust return drivers in the cross section of expected returns. In this study, the EDHEC-Risk researchers examine how to exploit the value and momentum anomalies using a Dynamic Core-Satellite investment model.
The implementation of the portfolio strategies is enabled by exchange-traded funds, which are natural investment vehicles since they offer a broad exposure to the markets and provide the necessary liquidity to the frequent rebalancing of the Dynamic Core-Satellite model.
Momentum and value investment strategies alone could achieve higher returns but are exposed to high extreme risk because they consist of equity portfolios that are concentrated in the sectors with the highest value or momentum exposure. Combining these strategies with the DCS approach, however, dopes portfolio returns and, at the same time, keeps downside risk in check.
Exchange-traded funds on sectors rather than on stocks can be used to put these strategies into effect; ETFs also greatly facilitate the shifts—required by dynamic strategies—from core to satellite.
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