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White paper — Asset Allocation Strategies

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By def­i­n­i­tion, sys­tem­at­ic risk can­not be diver­si­fied away. There­fore, at Swan, we believe if you can’t diver­si­fy away sys­tem­at­ic risk, you must hedge it away.

Swan’s Defined Risk Strat­e­gy (DRS) was specif­i­cal­ly built to com­pen­sate for lim­i­ta­tion in asset allo­ca­tion and some of the inher­ent weak­ness­es in stock selec­tion, mar­ket tim­ing, and asset allo­ca­tion (includ­ing buy-and- hold invest­ing).

 

The goal of this study is to show how hedged equi­ty, through an invest­ment vehi­cle such as the DRS, can be supe­ri­or to tra­di­tion­al asset allo­ca­tion or help enhance it.

Exec­u­tive Sum­ma­ry:
• The DRS was cre­at­ed to achieve the same goals of increased returns and reduced risks sought by a diver­si­fied MPT port­fo­lio. How­ev­er, Swan DRS seeks to achieve the­se goals in a much sim­pler man­ner; one with more quan­tifi­able risks and with less mov­ing parts.
• The DRS seeks to direct­ly and explic­it­ly man­age mar­ket risk. Tra­di­tion­al asset allo­ca­tion takes an indi­rect and not-always effec­tive approach in attempt­ing to mit­i­gate risk.
• The DRS seeks to provide favor­able absolute and risk adjust­ed returns com­pared to almost any asset class or diver­si­fied port­fo­lio over an entire invest­ment cycle.
• Port­fo­lio allo­ca­tions to the Swan DRS may be ben­e­fi­cial to investors and advi­sors diver­si­fied port­fo­lio over an entire invest­ment cycle. Sim­i­lar­ly, we exam­ine the impacts on the risk/return met­rics after fit­ting the DRS into a port­fo­lio to ful­fill those var­i­ous roles.

The results are intrigu­ing.

This white paper seeks to high­light 13 pop­u­lar, well-known asset allo­ca­tion strate­gies and illus­trate how an allo­ca­tion to the DRS could offer favor­able absolute and risk adjust­ed returns.