By Jeffrey Bailey, David Tierney
Controlling Misfit possibility in Multiple-Manager funding courses is a pragmatic, instructive advisor which deals an answer to a problem progressively more associations are facing-misfit hazard. whilst a sponsor makes use of a number of managers for one asset classification, type biases could cause the sponsor's managers in mixture to underperform the objective regardless of each one person supervisor appearing good opposed to the manager's benchmark. during this quantity, the authors supply an easy analytical framework for comparing and treating this in all probability expensive misfit challenge.
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Additional info for Controlling Misfit Risk in Multiple-Manager Investment Programs (Research Foundation of AIMR and Blackwell Series in Finance)
Consequently, although the combination of style portfolios may display acceptable common factor risk characteristics, the underlying industry- and stock-specific misfit risk may still be present and compromise the performance of the Illisfit-control portfolio. 3, the aggregate portfolio of a plan sponsor's managers was segmented in the following manner: P =T + ( B * - T ) +A*. Now, define a hedge portfolio, H (that is, a portfolio of long and short positions that in total has no net dollar investment), with the following attributes: H = T-B*.
If a boat is listing to one side, shifting a certain amount of weight to the center of the boat will relieve some of the tilt but not as efficiently as shiftiig the same weight to the other side of the boat. Furthermore, because an index fund has a zero (actually, slightly negative) expected active-managementreturn, taking assets from the active managers and placing them in an index fund will reduce the investment program's expected value-added returns. If the plan sponsor has not previously used passive management, it makes little sense to sacrifice positive expected value of active management to control misfit through the Lase of an index fund.
As a result, to achieve acceptable misfit reduction, the sponsor may be forced to hire a manager who provides little or nothing in terms of active-management skills. The misfit horse has been put before the valueadded cart. Third, and perhaps most importantly, the misfit problem is dynamic, potentially changing from period to period. What happens if the plan sponsor chooses to alter the manager alignment, perhaps firing an existing manager and replacing that manager with another or simply deciding to allocate more funds to an existing manager and less to another?