New Directions in Active Portfolio Management

Stability Analytics - Risk Parity - Rating & Ranking - Geometric Shape Factors

Modern Portfolio Theory founded by Harry Markowitz [1952] celebrates this year his 60th anniversary. When he published more than half a century ago his article Portfolio Selection in the Journal of Finance, our knowledge in mathematical finance, financial time series analysis and statistics as well as computer science was much less developed compared with the options and the tools we have today at our hands.

So, it is worth not only to look back, but also to make use of recent developments in the mentioned fields. Within this short overview we like to report on a bundle of new ideas based on modern concepts of stability analytics to have an alternative view on risk in funds and portfolios and their impact on indexation techniques and tactical portfolio management.

The main topics we like to address are based on univariate and multivariate statistical methods to identify instabilities and to detect and explore vulnerabilities in financial time series. With this approach we like to reinvestigate and to contribute to better understand performance and risk in market indices, funds and portfolios.

The indicators derived from our approach allow us to create a distinct view on the weaknesses of classical asset allocation and modern portfolio theory and to think in alternatives and new directions.

In this review we concentrate on recent results from new style indexation techniques and close-to­‐index managed funds and portfolios. The key points include:

1. Stability analytics for better benchmark indices and portfolios 2. Stability control and parity risk indexation for alternative benchmarks 3. Stability rating and ranking of assets for a refined quality selection process 4. Geometric shape factor models to visualize and predict risk in portfolios

In the following we present for each topic a short description of our new ideas, concepts, and methods. We like to keep this report comprehensive. Whenever we have published preliminary results we focus on the principles and give references to further information and details.