Direct Risk Targeting + Systematic Active Rebalancing = Alpha

Direct Risk Targeting is a new way to construct Active Fixed Income portfolios. It is an evolution of Modern Portfolio Theory (MPT) introduced by Harry Markowitz in his seminal 1952 paper "Portfolio Selection".

We modify Markowitz Portfolio Optimization's 2-step process and add 1 more step.

Identify Market Risk using a Benchmark Security or Index, Portfolio, or Macro input, and also construct a covariance matrix based on the historical risk of securities to be used – we select these using parameters for liquidity, sector, etc
ARAM’s innovation: Our eCIO algorithm computes a “Direct Risk Target” based on the Market Risk input from Step 1, which imposes an Environment Risk Suitability condition to the portfolio’s target risk. This is based on our experience and can differ significantly than the computed Market Risk input.
The Direct Risk Target is then used as the input to an optimizer to construct an Optimal Portfolio and generate weights for security selection and portfolio construction

We have been researching Macro and Market Risk since 1988 and have concluded that, in Fixed Income, historical Risk has predictive power, with a decay period that varies in different Risk Regimes.

We systematically rebalance periodically, repeating Step 1 for subsequent periods, to stay ahead of Risk decay, making our Model Portfolios able to respond to Risk and Regime changes, resulting in Activeness that is quantifiable.

Our Active portfolios are constructed Systematically, with no biases or emotions, unlike human CIOs and portfolio managers.

Our process results in both significant Alpha and greater liquidity than directly owning bonds.

These model portfolios unlock and unleash the potential of Fixed Income, Maximizing Returns while reducing Risk!

Fact Sheets for the Model Portfolios are on our Documents page.

Available on Schwab iRebal, InterActive Brokers, and as Direct Indices on indexone.io

The Returns summarized above are out-of-sample simulated/hypothetical returns for the Model Portfolios. Fees are assumed. The underlying portfolio returns are based on the monthly Total Returns computed by Bloomberg for each of the underlying ETFs, with execution risk and liquidity at scale being the primary risks to the simulations.

Research on the risk targeting algorithms are continously improved, with the model returns replaced when we discover a better algorithm to reduce risk and improve stability of returns.

The model portfolios can be constructed from ETFs, mutual funds, REITs and stocks. Currently we are focusing on US and USD financial products, but will continously be adding new products and models.

Please see our Fact Sheets and newsletters for details and commentary on how model portfolios are constructed.

ARAM's Plus Alpha: A Solution based on Research
on Fixed Income Risk, Behavioral Biases and Market Structure

37 years of experience in Fixed Income, in Research, Trading, Sales and Asset Management, including Trading with 500+ Invesment Managers the 1990s

1987-2024: Continuously solving Risk and Asset Pricing problems using Macro Economics

2014: Studies of Market Structure in Fixed Income and MBS – identification of Shortcomings and Biases; PerfectVision dream is formed

2016-2018: Papers on Market Structure, including letters to the SEC

2016: Solution to Market Structure limitations – AGG Plus Alpha (Mutual Funds)

2017: Extended to ‘Retail version’ – using ETFs

2017-2023: Solutions for other applications: REITS, High Yield, Dividend Stocks, OCIO, Asset Allocation, Factor Equity portfolios, and more

2023: Gen 2 of Agg Plus Alpha created – using ETFs - improvements in Risk Targeting

2024: Gen 3 Plus Alpha created – further improvements in Risk Identification and Risk/Return tradeoffs

eCIO: the Future of Fixed Income

Unlocking the Potential of Fixed Income

Summary of Active Fixed Income Model Portfolio performance - Dec 2024