Accurately identifying and managing active risk exposures is essential to fiduciaries’ efforts to add value over policy benchmarks while limiting the impact of unintended shocks to the portfolio returns. This paper presents a framework for distinguishing between market and active risk exposures.

The growing use of hedge funds in institutional portfolios has raised the issue of whether hedge funds should be considered a separate asset class. Although hedge funds do not satisfy the traditional criteria for an asset class, fiduciaries may need to segregate them in policy portfolios to reflect their special characteristics.

Investors instinctively associate risk control with avoiding losses. But limiting risk is also a way to build wealth, especially when combined with systematic informed risk budgeting.

The theoretical promise of LDI must be matched by excellence in implementation. Best practices in investment policy, active management, and performance evaluation require markedly different approaches from those in traditional plans.

Whether to use leverage and how best to use it to improve the efficiency and risk-adjusted returns of portfolios are among the most relevant and least understood questions confronting investors. The optimal leveraged portfolio has a different asset allocation than the optimal unleveraged portfolio because of differences in the costs of borrowing against the underlying asset classes.

Before the 2008 credit crisis, securities lending was widely seen as a low-risk, low-return means of generating incremental income on portfolio holdings. Few suspected that this seemingly innocuous ancillary activity would ensnare them in a hidden liquidity trap. This paper describes how the securities lending market functions and how it unraveled during the credit crisis, and highlights the need to reassess the risk-reward tradeoff of securities lending.

In “Semantic Risk: Reading Between the Lines in your Portfolio” we discuss that while investors make a science of the study of risk, they consistently create new hazards through the simple act of framing their decisions using terminology that is outdated, misunderstood or misleading.

Portable alpha strategies transfer alpha from one asset class to another by combining hedge funds with futures. This feature enables such strategies to exploit opportunities in all asset classes. Since portable alpha products are designed to maximize return per unit of risk, they can be useful tools in improving the return efficiency of an institution’s total portfolio, as we illustrate in building an “alpha pyramid.”

Investors are facing global capital markets that are likely to deliver lower than historical returns going forward. Four major economic and social paradigm changes have cut the risk premia offered by financial assets: deregulation, globalization, increased life expectancy, and improved diversification methods. By decreasing risks or increasing tolerance for volatility, these forces have combined to produce a distinctly different optimal portfolio than was the case 20 years ago. To cope with this new environment, they need to use advanced methods to maximize return efficiency.

U.S. institutions have increasingly adopted portfolios with large allocations to illiquid alternatives. This paper reviews certain portfolio management pitfalls created by diversification into illiquid assets, proposing tools and techniques to avoid falling prey to the costs of low liquidity at times of market stress.