Dynamic asset allocation is a strategy used by investment products such as
hedge fund
A hedge fund is a Pooling (resource management), pooled investment fund that holds Market liquidity, liquid assets and that makes use of complex trader (finance), trading and risk management techniques to aim to improve investment performance and ...
s,
mutual fund
A mutual fund is an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...
s,
credit derivative
In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the ''credit risk''"The Economist ''Passing on the risks'' 2 November 1996 or the risk of an event of default of a corp ...
s,
index fund
An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that it can replicate the performance of a specified basket of underlying investments.
The main advantage of index fun ...
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.
Overview
Dynamic asset allocation includes
CPPI, which consists of a guarantee, notionally related to a
zero-coupon bond
A zero-coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term zer ...
and an underlying investment. Assets are dynamically shifted (or allocated) between these two components depending largely on the performance of the underlying investments.
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 (TAA) 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.
Strategy descriptions
TA ...
/
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. The strategy focuses on general movements in the market rather than on performance of individ ...
(TAA/GTAA) around a strategic benchmark. Indeed, many investment firms and commentators use the terms TAA, DAA, and GTAA interchangeably.
What is Dynamic Asset Allocation Strategy? Dynamic Asset Allocation Portfolio Management
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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
The London Inter-Bank Offered Rate (Libor ) was an interest rate average calculated from estimates submitted by the leading Bank, banks in London. Each bank estimated what it would be charged were it to borrow from other banks. It was the prim ...
+ 500), while TAA mandates will tend to have performance targets that reference market indices (e.g. 50% S&P 500
The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the stock performance of 500 leading companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices and in ...
/ 50% Barclays Capital Aggregate Bond Index
The Bloomberg US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in ...
+ 200{{Not a typo, bps).
See also
*Tactical asset allocation
Tactical asset allocation (TAA) 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.
Strategy descriptions
TA ...
*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. The strategy focuses on general movements in the market rather than on performance of individ ...
*Constant proportion portfolio insurance
Constant proportion portfolio investment (CPPI) is a trading strategy that allows an investor to maintain an exposure to the upside potential of a risky asset while
providing a capital guarantee against downside risk. The outcome of the CPPI strat ...
*Credit derivative
In finance, a credit derivative refers to any one of "various instruments and techniques designed to separate and then transfer the ''credit risk''"The Economist ''Passing on the risks'' 2 November 1996 or the risk of an event of default of a corp ...
* Principal protected note
* Structured investment products
*Zero-coupon bond
A zero-coupon bond (also discount bond or deep discount bond) is a bond in which the face value is repaid at the time of maturity. Unlike regular bonds, it does not make periodic interest payments or have so-called coupons, hence the term zer ...
References
Dynamic Asset Allocation
Dynamic Asset Allocation