Tremont arrived at its Libor/S&P 500 mix by constructing a model 'opportunistic', or equity-like, institutional fund-of-hedge-fund portfolio and back tested it against eight years of hedge fund performance data. After arriving at an historic volatility for the model portfolio, Tremont found the same volatility on a continuum of different weights of the S&P 500 and Libor and arrived at the 3:7 ratio.
An investor would invest in an ‘opportunistic’ fund of funds, as opposed to a 30% Libor and 70% S&P 500 basket, because, while the volatilities are the same, the fund of funds offers higher returns that are little correlated with other traditional asset classes in an investor’s portfolio.
Tremont, which is seeking to build its pension fund investor base, has one client basing its performance against the new benchmark – the Teacher Retirement System of Texas.
The week on Risk.net, July 7-13, 2018Receive this by email