We have often heard before the expression, ‘don’t put all your eggs in one basket’, valuable advice, especially when it comes to building portfolios.
Since the introduction of modern portfolio theory by Harry Markowitz in 1952, portfolio optimisation has been well debated amongst investment professionals. The goal of any portfolio optimiser is to select the best portfolio out of all possible portfolios, according to the investment objective. The objective typically seeks to maximise the expected return while controlling for the acceptable level of risk. Modern portfolio theory measures the effects of diversification when risks are correlated, and provides a framework for measuring diversification.
In Aurum’s 26 years of experience in managing fund of hedge fund portfolios, we are very much aware of the complexities of portfolio optimisation when building a portfolio of hedge funds in the real-world.
