Dynamic asset allocation is a strategy used by investment products such as
hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
s,
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...
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 co ...
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 the fund can a specified basket of underlying investments.Reasonable Investor(s), Boston University Law Review, avai ...
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
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 zero- ...
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
TAA ...
/
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
/ref>
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 is an interest-rate average calculated from estimates submitted by the leading banks in London. Each bank estimates what it would be charged were it to borrow from other banks. The resulting average rate is u ...
+ 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 large companies listed on stock exchanges in the United States. It is one of the most commonly followed equity indices. As of ...
/ 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).
References
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
TAA ...
*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 stra ...
*{{slink, Financial risk management#Investment management
*Hedge fund
A hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance, such as ...
s
*Mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...
*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 co ...
*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 the fund can a specified basket of underlying investments.Reasonable Investor(s), Boston University Law Review, avai ...
* 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 zero- ...
Dynamic Asset Allocation
Dynamic Asset Allocation