White paper

Sep. 25, 2018

Portfolio Optimization

White paper — Portfolio Optimization

Thinking Outside the Style Box

Swan is focused on helping provide financial advisors with the thought leadership necessary to differentiate themselves and make their businesses stronger and more valuable. The purpose of this document is to highlight our theoretical view that a diversified hedged assets portfolio is a more effective and efficient way to optimize a portfolio than traditional portfolio optimization.

The goal will be to present evidence to support the following portfolio management perspectives:

• Traditional portfolio optimization (MVO) is flawed and potentially misleading and the efficient frontier is of limited use
• Traditional portfolio optimization leads to fairly indistinguishable asset allocations
• Traditional portfolio optimization fails to minimize losses, as they are built to minimize volatility
• An alternative approach to portfolio optimization (such as the Defined Risk Strategy), that directly addresses
market risk, can lead to more effective and efficient portfolios
• Portfolio results can be improved through the use of hedged assets
• A defined risk portfolio, built upon the concept of maximizing return while minimizing an investors’ possible
level of “pain”, could introduce a paradigm shift away from traditional portfolio optimization

Swan believes it is important that investors have a better understanding of Modern Portfolio Theory, how it is broadly used to construct portfolios, and the implications of applying MPT versus different approaches to portfolio construction when considering their own investments, portfolios and long-term goals.

This paper endeavors to provide a broader understanding and the alternative approach to portfolio construction and optimization inherent in the Defined Risk Strategy.