1© 2017 Windham Capital Management, LLC. All rights reserved.
Confidential. Not for redistribution.
2017 1
Controlling Risk
Effective Strategies for
Diversification
Andrew B. WeismanWindham Capital Management, LLC
Managing Partner & Head of Liquid Alternative Strategies
2© 2017 Windham Capital Management, LLC. All rights reserved.
JPMORGAN’S “TYPICAL PENSION ALLOCATION”
Merthaler, Karl and Zhang, Helen. “Public Pension Funds: Asset Allocation Strategies,” JPMorgan Investment Analytics and Consulting, June 2010.
Asset Class Sub-Asset Class Proxy Allocation
Equities 52%
International Total International Stock Index
Emerging Markets Emerging Markets Stock Index
Domestic Large Cap Total Stock Market Index
Domestic Small Cap Small Cap Index
Domestic Small Cap Value Small Cap Value Index
Domestic Large Cap Value Value Index
Fixed Income 28%
Cash Cash
Short Term Bonds Short Term Bond Index
Intermediate Term Bonds Total Bond Market Index
TIPS Bonds TIPS Index
Real Estate 5%
REITs REIT Index
Alternatives 14%
Hedge Funds HFRI Global Hedge Fund Index
Within each asset class the allocations are equally divided The sub-asset classes were proxied with Index ETFs
This is a hypothetical representative portfolio used for illustrative purposes only.
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LOTS OF STUFF; BASICALLY JUST ONE RISK
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SIGNIFICANT MONETARY STIMULUS
$-
$500,000,000,000.00
$1,000,000,000,000.00
$1,500,000,000,000.00
$2,000,000,000,000.00
$2,500,000,000,000.00
$3,000,000,000,000.00
$3,500,000,000,000.00
$4,000,000,000,000.00
$4,500,000,000,000.00
Federal Reserve System Open Market Account
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POTENTIALLY UNPRECEDENTED FISCAL STIMULUS
• Proposed $10 Trillion Stimulus Plan
• Current National Indebtedness is Approaching $20 Trillion
• $1 Trillion increase to Infrastructure
• $1 Trillion increase to defense
• Tax Reductions for Small and Large Businesses, Estimated
at $2 to $4 Trillion
Source: Washington Post
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STOCKS VERSUS BONDS: IS IT REALLY A BALANCE?
Ten Year Note Yield
Corr
elat
ion v
s. S
&P
0.0% 2.0% 12.0%10.0%8.0%6.0%4.0%
0.0
-0.4
-0.6
0.8
0.6
0.4
0.2
-0.2
-0.8
Analysis based on 2−year rolling correlations using
monthly S&P 500
returns (excluding dividends) and 10 year T−Bond yields
from May 1953 to
June 2014.
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TARGET FED FUNDS RATE
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EFFECTIVE FED FUNDS RATE
Source: Board of Governors of the Federal Reserve
0
1
2
3
4
5
6
71
/1/2
00
0
9/1
/20
00
5/1
/20
01
1/1
/20
02
9/1
/20
02
5/1
/20
03
1/1
/20
04
9/1
/20
04
5/1
/20
05
1/1
/20
06
9/1
/20
06
5/1
/20
07
1/1
/20
08
9/1
/20
08
5/1
/20
09
1/1
/20
10
9/1
/20
10
5/1
/20
11
1/1
/20
12
9/1
/20
12
5/1
/20
13
1/1
/20
14
9/1
/20
14
5/1
/20
15
1/1
/20
16
9/1
/20
16
Effective Fed Funds Rate
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ENDOWMENT CASE STUDY
PERFORMANCE OF AN ACTUAL ENDOWMENT:(12, 1995 – 10, 2012)
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WHAT RISKS DID WE TAKE?
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WHAT DID THE RISKS/RETURNS LOOK LIKE OVER TIME?
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A THOUGHT EXPERIMENT:
THE POWER OF STATISTICAL INDEPENDENCE
0.5 correlation between portfolio assets
0.0 correlation between portfolio assets
Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4 Portfolio 5 Portfolio 6
5 Assets 10 Assets 20 Assets 30 Assets 50 Assets 3 Assets
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STATISTICALLY INDEPENDENT RISK FACTORS:
AN INVESTORS BEST FRIEND
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REDUCED VOLATILITY ISN’T THE END OF THE STORY
𝒓 ≈ 𝒙 −𝝈2
2
9.30%
9.40%
9.50%
9.60%
9.70%
9.80%
9.90%
Geometric Mean Return
Sin
gle
Ass
et
Po
rtfo
lio 1
Po
rtfo
lio 6
Po
rtfo
lio 2
Po
rtfo
lio 3
Po
rtfo
lio 4
Po
rtfo
lio 5
0.5 Correlation 0.0 CorrelationN(0.1,0.1)
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CRITIQUING THE TYPICAL PORTFOLIO
• The largest single allocation typically goes to the most volatile component: the Equity Risk Premium.
• Relying on a negative stock/bond correlation is problematic.
• Other relatively well-known, robust risk factors are typically under-represented.
• Portfolios can have harmful unintended risk factor exposures, such as a short exposure to commodity roll yield.
• These imbalances lead to poor risk-adjusted performance.
• A better balance of risk factors can significantly enhance results over a market cycle.
16© 2017 Windham Capital Management, LLC. All rights reserved.
BIOGRAPHIES
ROBERT BERNSTEIN is a Managing Partner and Head of Business Development at Windham Capital
Management, LLC. He joined Windham in 2012 and is the head of sales and client relationships. Before joining
Windham Capital, Rob served as U.S. Head of Business Development and Managing Director of BNP Paribas
Investment Partners, where he designed and executed a U.S. business strategy for multiple client segments. Prior to
that, he was Head of Business Development and Managing Director at AG Asset Management, LLC. Earlier in his
career, Rob was a Principal and Senior Vice President for Webster Investment Management, LLC, the strategic
investment arm of Gordon Getty’s family office in San Francisco, and Senior Vice President for GE Asset
Management.
ANDREW B. WEISMAN is a Managing Partner of Windham Capital Management and Portfolio Manager for
Windham Liquid Alternatives. Mr. Weisman has more than 25 years of experience as a portfolio manager of
alternative investment strategies. Prior to joining Windham in 2016, Mr. Weisman was the Chief Investment
Officer of Janus Capital’s Liquid Alternative Group from 2012 to 2016. Prior to joining Janus Capital, he was
Chief Executive Officer of WR Managed Accounts, LLC from 2008 to 2012. In 2002 he was awarded the
Bernstein Fabozzi/Jacobs Levy Award for outstanding article published in the Journal of Portfolio Management.
In 2016 he was awarded the Roger F. Murray Prize (First Place) by the Institute for Quantitative Research in
Finance. He is also a Board Member of the International Association for Quantitative Finance and President of
the Society of Columbia Graduates.
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UPCOMING WEBINARS
Windham Software Overview
Wednesday, March 15 at 11am
Glide Paths Workshopwith Cel Kulasekaran
Wednesday, April 26th at 11am and 2pm
www.windhamlabs.com/webinars/
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CONTACT & DISCLOSURES
DISCLOSURES: The information contained in this presentation (the “Presentation”) is highly confidential and is not to be reproduced or
distributed to any other persons (other than professional advisors of the prospective investors receiving these materials). The Presentation is
intended solely for the use of the persons to whom it has been delivered. This Presentation has been prepared solely for informational
purposes. The Presentation is not intended to provide professional or investment advice, and you are advised to seek independent
professional advice prior to investing in any products or strategies described in the Presentation or recommended by Windham Capital
Management, LLC. In addition, this Presentation is neither an offer to buy or sell any securities, nor a solicitation of an offer to buy or sell
interests or shares in any fund or strategy.
Performance shown is simulated from January, 2000 – May, 2014. The returns presented as “Simulated” performance do not reflect actual
trading and they may not reflect the impact that material economic and other factors might have had on Windham’s decision-making if
Windham were actually managing money. Net performance is calculated by deducting a 1% management fee and trading costs. Simulated
results are derived from the performance of investment models created by Windham and applied to a hypothetical account.
Historical data and other information contained herein is believed to be reliable, but no representation is made as to its accuracy,
completeness, or suitability for any specific purpose. Windham accepts no liability (whether in tort or contract or otherwise) for any loss or
damage arising from any inaccuracies or omissions. Past performance figures, including any projection or forecast, are not necessarily
indicative of future or likely performance of any investment products. No assurance may be given that the strategies’ investment objectives will
be achieved. Investments are subject to investment risks including possible loss of principal amount invested.
Opinions expressed are current opinions as of the date appearing in this material only. References to market or composite indices,
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Reference to an index does not imply that the Windham portfolio will achieve returns, volatility or other results similar to the index. The
composition of a benchmark index may not reflect the manner in which a Windham portfolio is constructed in relation to expected or achieved
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which are subject to change over time.
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