Asset Allocation

The principles underlying asset allocation are simple: While each asset class has inherent risks, when combined with other asset classes, the resulting blends have historically demonstrated reduced volatility while maintaining a greater total return. Most managers re-balance allocations annually to avoid over- weighting in any specific investment class or vehicle. Hg Capital approaches traditional asset allocation differently by periodically redefining the allocation mix, using objective methods, as environments change.

How it Works

History shows that not all classes of assets move up and down at the same time. For example, one year large company stocks may generate the best returns while in another, it may be government bonds. Additionally, some asset classes are far more volatile than others, going from big gains to big losses in relatively short time frames, while the performance of less-volatile counterparts stay within a much narrower range. By mixing complementary asset classes a balanced portfolio can be achieved.

The Limitations

However, in recent bear market environments, the benefits of traditional diversification were greatly diminished as the behavior of most asset classes was highly correlated. We, like many proponents of asset allocation, find that allocations created using Modern Portfolio Theory (MPT) often produce inferior results in difficult market environments. Losses are often larger or returns smaller than models would suggest. As a result, many allocation purveyors adjust standard models with subjective rules in an attempt to add value to improve their results. We believe that this added subjectivity produces unreliable results that are difficult or impossible to reproduce.