Making optimisation techniques robust with agnostic risk parity

The alternative investment industry is becoming ever more accessible to those wishing to diversify away from traditional portfolios. With interest rates at record lows, bonds and equity indices look less enticing investment opportunities than they once did and alternatives in friendly formats are looking like potentially meaningful diversifiers. Alternative benchmark strategies are often simple to understand and in some cases to paper trade but in practice require the necessary implementation skill set to fulfil their potential.

In this short note we discuss portfolio construction, an area of research that has been a point of focus for many years in trading equities at CFM and which has more recently become an active part of the research program in directional strategies. The fruits of this research program are presented in this note in a procedure basedon the techniques of Markowitz’s Mean Variance Optimisation (MVO) and extended to the idea of Agnostic Risk Parity (ARP). We use a Trend Following strategy to illustrate the effectiveness of the approach in building a robust portfolio of correlated instruments.