Friday, March 6, 2015

Outcome oriented investing



The traditional approach to investing is to employ an allocation oriented investment management framework. A portfolio is structured with different asset allocations in order to meet some long-term strategy allocation benchmark and some need expressed by the investor. A simple case would be a 60/40 stock bond portfolio mix for an investor who wants upside but not equity risk. Nevertheless, delivering that allocation should not be the end. The resolution is to deliver specific outcomes to investors.

There are buckets or weights for  any asset allocations and the manager fills the buckets. There is nothing wrong with this approach but it may not get at the heart of what is most important with any investment program - the overall objective for the investing. There is not a clear focus in goal-seeking behavior with allocation based investing.

There has been a new under-current of interest in what is now called outcome oriented investing. Forget about the asset allocation weights and just focus on the outcomes that are desired. An outcome  could be a return target. It could be a drawdown limit. It could be performance subject to a specific scenario. It could be tail risk hedging. The focus could be on income production over total return. The focus for portfolio building is on what the investor ultimately wants. The focus is on aligning portfolios with investor desires and not some notion of what should be convention. The allocations is not the goal but the means to achieve the goal. If the allocation does not address the desired outcome, it has to change.

Does this mean a wholesale change in investment management behavior? Not at all. But, an outcome focus will mean a greater emphasis on the results that are being achieved relative to goals. It requires more dynamic asset management. If you are not hitting the target, it is time to adjust.

Outcome oriented investment is a challenge but also the advantage potentially provided by the  hedge fund investment manager. Without benchmarks, hedge funds can focus on the goals of an investor and deliver what is actually desired - absolute return and and hedge from overall market exposure if that is what the investor wants. The focus can be low correlation because that is the out desired. hedge fund investing has to again focus on its advantage - the chance to deliver on specific outcomes.

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