RT Journal Article
SR Electronic
T1 The Dangers of Diversification: <em>Managing Multiple Manager Portfolios</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 13
OP 23
DO 10.3905/jpm.2017.43.2.013
VO 43
IS 2
A1 Gerald Garvey
A1 Ronald N. Kahn
A1 Raffaele Savi
YR 2017
UL https://pm-research.com/content/43/2/13.abstract
AB Investors have long built portfolios diversified across managers and have long applied mean–variance analysis to allocate to managers. This classic approach has at least three challenges. First, and most important, it concentrates risk in generic ideas correlated across managers. This can lead to unexpected tail risk. Second, it provides a temptation to overlever the resulting portfolio, which often appears to have very low risk but a high information ratio. Third, it typically combines underlying funds managed for standalone performance rather than performance of the portfolio, often leading to overdiversification. The authors analyze these three challenges and propose solutions. Unfortunately, the solutions are not easy to achieve.TOPICS: Portfolio construction, manager selection, tail risks, risk management