Risk model

Our model doesn’t make assumptions about the shape of every asset class’s distribution, nor their correlations with other assets. Instead, we remix historical index returns themselves.

Each simulation is generated by picking random months from history, and appending the returns for every asset class in each month as we go along. This captures a lot of the desired behaviour - but not all.

So, to capture momentum and mean-reversion, we apply a chance of using the very next month in sequence. In this way, we preserve the unique characteristics of each asset class. The return paths are consistent with observed history, but not the same.

As a result, our simulations preserve the possibility of real-world extreme events, such as the Financial Crisis of 2008, but crucially don’t assume that the future will be a copy and paste of the past.

Sample Asset Allocations - Five categories

Each risk level has a set of Strategic Asset Allocations which sit close to the centre of the risk band. 

The portfolios are ‘suitably’ optimized meaning that they offer the highest expected returns for each risk band, whilst also aiming to have a sensible and coherent allocation to the different asset classes throughout the different Suitable Risk Levels.  More granular SAAs including property, commodities and hedge funds are available on request

Sample Asset Allocations - Seven categories

Indices

The risk model uses 30 years of historic market data and the underlying indices are used to model each asset class. For more details please refer to this article. We have explored providing a more granular break down of alternatives but have concluded that the additional benefits of breaking hedge funds down further are minimal - at least where hedge funds are a relatively small part of a diversified portfolio.