Dynamic Asset Allocation
Encyclopedia
Dynamic asset allocation is a strategy used by investment products such as hedge funds, mutual funds, credit derivatives, index fund
s, principal protected notes
(also known as guaranteed linked notes) and other structured investment products to achieve exposure to various investment opportunities and provide 100% principal protection.
Dynamic asset allocation includes CPPI
, which consists of a guarantee, notionally related to a zero-coupon bond and an underlying investment. Assets are dynamically shifted (or allocated) between these two components depending largely on the performance of the underlying investments, and based on some .
In some cases, certain products can use a borrowing facility to enhance exposure if the underlying investments experience strong returns. If the underlying investments decline in value, CPPI automatically deleverages, reducing exposure in falling markets.
The term 'Dynamic Asset Allocation' (DAA) can also refer to an investment strategy that seeks to produce high total returns irrespective of the performance of market indices using the tools of Tactical asset allocation
/Global tactical asset allocation
(TAA/GTAA) around a strategic benchmark.
Indeed, many investment firms and commentators use the terms TAA, DAA, and GTAA interchangeably.
In the arena of institutional asset management DAA mandates tend to have absolute return targets that are not related to market index returns (e.g. USD LIBOR + 500bps), while TAA mandates will tend to have performance targets that reference market indices (e.g. 50% S&P 500
/ 50% Lehman Aggregate Bond Index
+ 200bps).
Index fund
An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.-Tracking:Tracking can be achieved by trying to hold all of the...
s, principal protected notes
Principal protected notes
A Principal protected note is an investment contract with a guaranteed rate of return of at least the amount invested, and a possible gain....
(also known as guaranteed linked notes) and other structured investment products to achieve exposure to various investment opportunities and provide 100% principal protection.
Dynamic asset allocation includes CPPI
Constant proportion portfolio insurance
Constant proportion portfolio insurance is a capital guarantee derivative security that embeds a dynamic trading strategy in order to provide participation to the performance of a certain underlying asset. See also dynamic asset allocation...
, which consists of a guarantee, notionally related to a zero-coupon bond and an underlying investment. Assets are dynamically shifted (or allocated) between these two components depending largely on the performance of the underlying investments, and based on some .
In some cases, certain products can use a borrowing facility to enhance exposure if the underlying investments experience strong returns. If the underlying investments decline in value, CPPI automatically deleverages, reducing exposure in falling markets.
The term 'Dynamic Asset Allocation' (DAA) can also refer to an investment strategy that seeks to produce high total returns irrespective of the performance of market indices using the tools of Tactical asset allocation
Tactical asset allocation
Tactical asset allocation is a dynamic investment strategy that actively adjusts a portfolio’s asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing...
/Global tactical asset allocation
Global tactical asset allocation
Global Tactical Asset Allocation, or GTAA, is a top-down investment strategy that attempts to exploit short-term mis-pricings among a global set of assets...
(TAA/GTAA) around a strategic benchmark.
Indeed, many investment firms and commentators use the terms TAA, DAA, and GTAA interchangeably.
In the arena of institutional asset management DAA mandates tend to have absolute return targets that are not related to market index returns (e.g. USD LIBOR + 500bps), while TAA mandates will tend to have performance targets that reference market indices (e.g. 50% S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
/ 50% Lehman Aggregate Bond Index
Lehman Aggregate Bond Index
The Barclays Capital Aggregate Bond Index, which used to be called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Barclays Capital, which took over the index business of the now defunct Lehman Brothers, and is often used to represent investment grade bonds being traded in...
+ 200bps).
See also
- Tactical asset allocationTactical asset allocationTactical asset allocation is a dynamic investment strategy that actively adjusts a portfolio’s asset allocation. The goal of a TAA strategy is to improve the risk-adjusted returns of passive management investing...
- Global tactical asset allocationGlobal tactical asset allocationGlobal Tactical Asset Allocation, or GTAA, is a top-down investment strategy that attempts to exploit short-term mis-pricings among a global set of assets...
- Constant proportion portfolio insuranceConstant proportion portfolio insuranceConstant proportion portfolio insurance is a capital guarantee derivative security that embeds a dynamic trading strategy in order to provide participation to the performance of a certain underlying asset. See also dynamic asset allocation...
- Hedge fundHedge fundA hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...
s - Mutual fundMutual fundA mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
- Credit derivativeCredit derivativeIn finance, a credit derivative is a securitized derivative whose value is derived from the credit risk on an underlying bond, loan or any other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself...
- Index fundIndex fundAn index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions.-Tracking:Tracking can be achieved by trying to hold all of the...
- Principal protected note
- Structured investment products
- Zero-coupon bond