GTAA and Global Macro for Long-term Institutional Investors

By Gerlof de Vrij, Roy Hoevenaars and Pieter Jelle van der Sluis

This article was first published as a chapter in Global Macro: Theory and Practice, by Risk Books.

Institutional Portfolio Management

Financial markets occasionally go through severe boom–bust phases. Based on their experience since the 1980s, investors have increasingly begun to realise that expectations of long-term risk premia are conditional on the current state of markets, and as such cannot be applied in strategic investment plans unconditionally. Furthermore, during the global financial crisis of 2007–09, institutional portfolios were subjected to unprecedented real-life stress tests, reinforcing the quest to build more robust portfolios.

Investors often overreact in their search for peace of mind by adopting short-term investment horizons and pro-cyclical risk management practices, which typically results in them paying an excessive insurance premium. Investors can be prone to overreaction on both sides: searching too desperately for yield on the upswings and hunkering down and buying too much expensive protection in the troughs. Long-term investors looking for robust all-weather solutions and confronted with high cyclicality and regime-switching behaviour of markets

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