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Expertise > Consulting > Portfolio Allocation

It is alfinas' belief that portfolio allocation strategy is the most relevant component behind the determination of the expected investment returns between two different portfolios and thus the most important decision for an investor. Therefore we spend a great deal of time analyzing appropriate investment funds strategies for our clients. We help them to select the asset allocation that provides the optimal combination of risk and return for their investment program.

The pre-asset allocation process involves four primary steps:

  • identification of alternative portfolios solutions,
  • projection of future cash flow conditions,
  • analysis of the interaction between the portfolios and the future cash flows,
  • implementation of diversified AIS asset classes exposures.

As part of the portfolio allocation study, our strategic planning tool is used in order to determine the optimal balance between portfolio risk and return and to conciliate the two primary objectives : maximized return and low volatility. In this process we:

  • Review the role of current asset classes and identify asset classes not represented in the portfolio,
  • Place constraints on the allocation to each asset class in the modeling process where applicable,
  • Establish risk, return and correlation forecasts for each asset class to be used as inputs for the optimization process,
  • Forecast returns based on an assessment of historical returns and current market conditions,
  • Present multiple asset allocation scenarios for the client to compare and evaluate.

Creating portfolios

A proper portfolio allocation should let the investor:

  • Maximize investment performance within specific risk constraints,
  • Evaluate projected funding requirements against various asset mixes,
  • Quantify risk and return potential of various asset classes,
  • Optimally diversify assets among different investment styles,
  • Plan future contribution requirements.

A portfolio of alternative investment funds (AIS) is not just a collection of funds. Throughout the process, we focus on quantifying, not just the expected case but also the downside risk in meaningful terms to the investor. We use a five-step process in constructing customized multi-manager AIS portfolios:

Portfolio Allocation Timeline

Investment Policy

Investment Strategy

Portfolio Construction

Monitor and Maintain

Set objectives

Establish each portfolio's risk and return goal. At least the following three questions must be addressed:
What rate of return does the investor need?
How much risk is required in pursuit of the goal? (Given the corporate risk profile and time horizon)
What is the most appropriate structure for the portfolio?

Identify preferences and constraints

Create an initial universe of sectors in which to invest and of potential managers within each sector.

Develop portfolio strategy

Apply "science" using an in-depth quantitative analysis of every manager; how each performed during market stress; how each manager cross-correlates with the others and the overall market.

Implement Portfolio Allocation

Use the "art" of a full qualitative review to assess each manager`s future prospects, as gauged by factors such as: portfolio creation and research process, ongoing risk assessment and control system.

Proceed to Stress Test and Simulation

Return to "science" by considering past and anticipated cross-correlation among managers. A Monte Carlo analysis will provide insight into the expected performance of the modeled portfolio, and thus greater confidence in the outcomes.

While the asset allocation is designed with the long-term in mind, each asset allocation strategy is revised annually to determine whether it still meets the needs of the investor. Depending on the needs of the client, we use mean/variance optimization, surplus optimization, and/or downside risk analysis to ensure that the chosen asset allocation solution remains optimal.

Risk Management

Understanding the source of risk is crucial in our business. We believe that the risk management process must start before an investment is initiated. In our demanding manager evaluation process, we rigorously examine the risk exposure and manager correlation. We aim to achieve the optimal constellation of risk, and further ensure that there is no breach of investment objectives. Our operational risk procedures seek to minimize the risks associated with each strategy as well as the global portfolio.

Risk Map

Risk factor mapping: all pieces of the risk puzzle associated with each strategy need to be addressed.