When managing an index aware fund* one intellectual challenge is to know how often to rebalance the fund to the index and how to do this.
While working with a greenfield Fixed Income asset management client we established a multi-stage protocol for this process:
- Determine the investible universe
- Determine upper and lower bounds for exposure at multiple levels - a "compliant modelling" approach that took classic mandate restrictions AND investment preferences and combined them into one iterative process.
- Look at available market liquidity
- Generate multiple sets of order proposals
- Execute compliance restriction rules on the proposed orders in one iterative process.
- Back test using some proprietary modelling techniques.
What does this give you?
A production-line for portfolio construction and implementation. With the iterative, computation intensive, data intensive processes performed by software, not trading desk assistants and portfolio analysts and assistant fund managers.
*Index aware is the term that we use in this blog post to refer to a fund that has a specific benchmark index (either a single index or a composite) but which does not slavishly follow the index.
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| A different kind of production line, St. Athan, Wales... |
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