Optimizing the manager structure in a downside risk framework

Research output: Contribution to journalArticle

Abstract

To decide the investment policy of a pension fund, a plan sponsor first conducts an asset allocation study and then he/she hires active managers to add active return to the portfolio. In order to seek active return, a plan sponsor must necessarily accept risk. But how much risk does the plan sponsor have to take, and how many managers does he/she have to hire? This problem that a plan sponsor often faced with is a manager selection problem. A lot of methods to decide the manager structure have been proposed, however, in the most cases the returns of the active funds are assumed to be normally distributed. In this, study I empirically show that the returns of actively managed funds are not normally distributed and a plan sponsor is impossible to optimize the. manager structure by using the standard mean variance model. To accurately capture the risk of the funds, I use the target semi-deviation as a measure of risk. In my framework, shortfall below the return of policy asset mix is recognized as risk, and manager's active alpha is adjusted by the target semi-deviation. I also propose a method to decompose a portfolio's target semi-deviation for converting the optimal manager structure into the optimal risk allocation.

Original languageEnglish
Pages (from-to)525-528
Number of pages4
JournalJournal of the Operations Research Society of Japan
Volume45
Issue number4
Publication statusPublished - 2002
Externally publishedYes

Fingerprint

Managers
Downside risk
Sponsor
Deviation
Risk allocation
Pension funds
Measure of risk
Asset allocation
Mean-variance model
Assets
Investment policy
Managed funds

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Decision Sciences(all)

Cite this

Optimizing the manager structure in a downside risk framework. / Takehara, Hitoshi.

In: Journal of the Operations Research Society of Japan, Vol. 45, No. 4, 2002, p. 525-528.

Research output: Contribution to journalArticle

@article{cec4cfdb26ff45278830758e32d21a10,
title = "Optimizing the manager structure in a downside risk framework",
abstract = "To decide the investment policy of a pension fund, a plan sponsor first conducts an asset allocation study and then he/she hires active managers to add active return to the portfolio. In order to seek active return, a plan sponsor must necessarily accept risk. But how much risk does the plan sponsor have to take, and how many managers does he/she have to hire? This problem that a plan sponsor often faced with is a manager selection problem. A lot of methods to decide the manager structure have been proposed, however, in the most cases the returns of the active funds are assumed to be normally distributed. In this, study I empirically show that the returns of actively managed funds are not normally distributed and a plan sponsor is impossible to optimize the. manager structure by using the standard mean variance model. To accurately capture the risk of the funds, I use the target semi-deviation as a measure of risk. In my framework, shortfall below the return of policy asset mix is recognized as risk, and manager's active alpha is adjusted by the target semi-deviation. I also propose a method to decompose a portfolio's target semi-deviation for converting the optimal manager structure into the optimal risk allocation.",
author = "Hitoshi Takehara",
year = "2002",
language = "English",
volume = "45",
pages = "525--528",
journal = "Journal of the Operations Research Society of Japan",
issn = "0453-4514",
publisher = "Operations Research Society of Japan",
number = "4",

}

TY - JOUR

T1 - Optimizing the manager structure in a downside risk framework

AU - Takehara, Hitoshi

PY - 2002

Y1 - 2002

N2 - To decide the investment policy of a pension fund, a plan sponsor first conducts an asset allocation study and then he/she hires active managers to add active return to the portfolio. In order to seek active return, a plan sponsor must necessarily accept risk. But how much risk does the plan sponsor have to take, and how many managers does he/she have to hire? This problem that a plan sponsor often faced with is a manager selection problem. A lot of methods to decide the manager structure have been proposed, however, in the most cases the returns of the active funds are assumed to be normally distributed. In this, study I empirically show that the returns of actively managed funds are not normally distributed and a plan sponsor is impossible to optimize the. manager structure by using the standard mean variance model. To accurately capture the risk of the funds, I use the target semi-deviation as a measure of risk. In my framework, shortfall below the return of policy asset mix is recognized as risk, and manager's active alpha is adjusted by the target semi-deviation. I also propose a method to decompose a portfolio's target semi-deviation for converting the optimal manager structure into the optimal risk allocation.

AB - To decide the investment policy of a pension fund, a plan sponsor first conducts an asset allocation study and then he/she hires active managers to add active return to the portfolio. In order to seek active return, a plan sponsor must necessarily accept risk. But how much risk does the plan sponsor have to take, and how many managers does he/she have to hire? This problem that a plan sponsor often faced with is a manager selection problem. A lot of methods to decide the manager structure have been proposed, however, in the most cases the returns of the active funds are assumed to be normally distributed. In this, study I empirically show that the returns of actively managed funds are not normally distributed and a plan sponsor is impossible to optimize the. manager structure by using the standard mean variance model. To accurately capture the risk of the funds, I use the target semi-deviation as a measure of risk. In my framework, shortfall below the return of policy asset mix is recognized as risk, and manager's active alpha is adjusted by the target semi-deviation. I also propose a method to decompose a portfolio's target semi-deviation for converting the optimal manager structure into the optimal risk allocation.

UR - http://www.scopus.com/inward/record.url?scp=33845204288&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=33845204288&partnerID=8YFLogxK

M3 - Article

VL - 45

SP - 525

EP - 528

JO - Journal of the Operations Research Society of Japan

JF - Journal of the Operations Research Society of Japan

SN - 0453-4514

IS - 4

ER -