Asset owners face a challenge in determining how a factor allocation fits into the overall equity program, in particular how the factor allocation relates to the existing roster of active managers. This paper uses a risk budgeting framework to investigate how active mandates and factor allocations can be combined. We address three key questions: 1) how does the level of active risk in active management affect the factor allocation decision, 2) what share of the portfolio can be deployed to the factor allocation and 3) what are the implications of a top-down versus a bottom-up factor allocation.
About Dimitris Melas MSc. Ph.D. CFA Dimitris Melas a regular LQG speaker is also Managing Director and Global Head of Equity Research at MSCI. Prior to joining MSCI in 2006, Dr. Melas worked at HSBC Asset Management as Head of Research and Head of Quantitative Strategies. Dr. Melas is a Chartered Financial Analyst and holds an MSc in Electrical Engineering, an MBA in Finance, and a Ph.D. in Applied Probability from the London School of Economics. He serves as Editorial Board Member of the Journal of Portfolio Management.
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