1991issue C071-8
Evaluating allocation sleeves against an index proxy
Two allocation wrappers reviewed from May 1989 through mid-February 1991 finished with annualized totals that were not distinguishable from a distribution-adjusted index proxy. The relative-price ratio and bull and bear betas well below one show how the mix lagged, caught up, and only partly transmitted equity-factor moves.
- A usable comparison path adds distributions back into price so payout-day drops do not mask the trend of the mix or the index proxy.
- Dividing each allocation path by the index-proxy path isolates mix-and-timing effects: the wrappers lagged in the May to October 1989 and summer 1990 advances, then rose sharply versus the proxy when the proxy fell in August 1990.
- Both wrappers showed bull and bear betas well below one versus the index proxy, so equity-factor moves were only partly transmitted.
- Editorial reading: score the sleeve on how the mix mutes the market factor through advances and declines, not on a match at the finish line.
A live mix that can be evaluated after the fact
Asset allocation is a policy of holding equities, bonds, and cash and shifting those weights as conditions change. By 1989, multi-asset wrappers that shifted among those three sleeves were offered at modest account sizes, so a live mix-and-timing policy could be evaluated after the fact.
Why the index proxy must be distribution-adjusted
An index proxy is a broad-market tracker used as the comparison path for a managed mix, measured on a distribution-adjusted basis. A usable comparison path adds distributions back into price. Otherwise payout-day drops mask the trend of both the mix and the index proxy. A distribution-adjusted price adds those distributions back as they occur so the payout-day drops do not hide the path.
A short window still crossed several market regimes
The reviewed record begins in May 1989 and runs about 21 months through mid-February 1991, a short span that still included several sharp market swings. A market regime is a stretch of advance or decline in the proxy against which the mix can be scored for lag, catch-up, or protection.
The finish line did not separate the wrappers from the proxy
On a five-day-averaged, start-normalized basis, two allocation wrappers and a broad-market index proxy all printed their sample highs on the same mid-February 1991 date, near 1.249 for the wrappers and 1.253 for the proxy. Over that same window the two allocation wrappers finished with annualized totals that were not distinguishable from the index proxy.
The relative-price ratio makes mix and timing visible
Dividing each allocation path by the index-proxy path isolates mix-and-timing effects. That relative-price ratio is the managed-mix path divided by the index-proxy path, used to make mix and timing shifts visible. The wrappers lagged during the May to October 1989 and summer 1990 advances, then rose sharply versus the proxy when the proxy fell in August 1990.
Bull and bear beta well below one
Both allocation wrappers displayed bull and bear betas well below one versus the index proxy, so equity-factor moves were only partly transmitted. Bull-and-bear beta is the separate sensitivity of the mix to the proxy in rising versus falling windows; values well below one imply muted market-factor exposure. That muting is beta hedging: equity-factor exposure is reduced so declines in the proxy are only partly transmitted to the mix. A buy-high, sell-low path in the index proxy could have lost more than 21% in one autumn, while the same timing in the allocation wrappers produced a loss of about half that size.
All readings on this track · 13 readings
- 1989Rank rotation opens the names; pairing keeps the hedge
- 1991Evaluating allocation sleeves against an index proxy
- 1991Construct an equity book by weakening residual co-movement, then setting a market slope
- 1992Sizing index futures to retarget portfolio beta
- 1992Portfolio beta overlays with index futures and puts
- 1997Construct a trailing stop from beta and price
- 1998An offense-defense matrix for regime-aware stock selection
- 1998Constructing a stock-book duration proxy from beta and bond markets
- 2007An index put as deductible insurance for an active stock book
- 2010Constructing option overlays for beta-adjusted portfolios
- 2014Long-only relative value with an index hedge and a crisis stop
- 2017Hedging a rising book with beta and ATR
- 2019Sizing micro index futures overlays for cash equity books