Can anyone please clarify what the core-satellite and completeness funds are?
Even after reading this part a couple of time, I still do not clearly understand what they are, how they are different.
Thanks in advance.
core-satellite. start with core (copy index) and go active with satellite (extra alpha with risk).
completeness. start with orig portfolio and complement it with other securities to “complete” your pf thru diversification.
Core-satellite is a strategy which helps an investor to secure a return through investing in core of holdings of a passive index and at the same time, adding some additional return through active manager. A common satellite investment is a holding in emerging markets securities, as they are highly volatie, but provide diversification due to the low correlation with traditional investments (which build the core).
In core-satellite the manager will still have some differences in risk exposure relative to the benchmark. In order to avoid this, the manager can use completeness fund approach, which says that:
completeness fund + active portfolio = risk exposure of the benchmark
In this case, active return is maintained and active risk minimized.
How does the completeness fund compare with core satellite approach? Its my understanding that completeness fund is a way to diversify concentrated positions in stock to get more market exposure when the funds cannot be sold. Core sat is a strategy for fund managers to increase active return while managing risk with no regard to illiquid/concentrated positions. The two strategies are used for two completely different investor profiles.
i’m getting the impression that core-sat starts off with passive index to make alpha. so the main focus would be your passive index base.
on the other hand, you start off with your active portfolio to save your ass with the completeness fund through diversification. so here your main focus would be your concentrated portfolio.
someone correct me please.
A core sat does not need to have a passive index as its main focus this is misleading. It can be a 20-40-40 split of core sat sat. A completeness fund diverifies a concentrated stock position with the rest of the available assets. It is not a solution to an active portfolio quite the opposite the position cannot be traded. The focus is decreasing unsystematic risk in favor of systematic risk.
Tell me if my thinking is correct.
Core Sat - Majority of the portfolio is in the index, lets say 80% and 20% let say in a active portfolio to generate alpha.
Completeness portfolio - You have a larger position in active management or concentrated position, 80% and 20 % in the index fund benchmark?
They seem like they are doing the same thing but the opposite with the goal of adding active risk for core sat and reducing active risk for a completeness portfolio
No… the percentage doesn’t matter.
Core = enhancing return, I remember there from Past exam or schweser where the core was like 20 to 30%. The core is just to meet your minimum requirement
Completeness = reducing risk. You want something that is uncorrelated or negatively correlated to balance out the portfolio. just add a passive asset doesn’t really do much.
So its based on changing your current position by adding active risk aka core sat, and reducing active risk completeness portfolio? this is kind of confusing.
what would happen if your current portfolio is 100% passive right now and i want to adopt a core sat?
So its based on changing your current position by adding active risk aka core sat, and reducing active risk completeness portfolio? this is kind of confusing.
what would happen if your current portfolio is 100% passive right now and i want to adopt a core sat?
It’s kinda base on behaviour portfolio theory. Let’s say you only need 50% of your fund to be “risk free”. The risk could be put into satelittes to enhance your returns. It’s just different layers and wants from your client.
It’s exactly like you say. Your using completeness because you can’t or won’t sell the asset, so to compensate you want to complete your portfolio by lower active risk. You could be a passive investor, but you want more active return, since your risk appeitie increase, so you ask your manager to increase your active return by having some satelittes (portable alpha, hedge funds, value or growth).
gotchya, makes more sense now! thanks!
Are completeness funds and completeness portfolios the same?
My understanding is that they are basically the same concept.
Completeness funds: An active pm adds a completeness fund to their portfolio so they have the same risk exposures as the investor’s overall benchmark. Page 220 vol4
Completeness portfolio: Builds upon a concentrated position by adding another portfolio so that the combo of the two tracks the benchmark as close as possible. Page 355 vol2
Can anyone confirm?
It seems both have the same purpose of bringing portfolio closer to benchmark.I guess their are the same thing.
So wait if percentage in pasive funds doesnt matter then technically it would be the same thing except with how you got there. did you start with a manger you liked and wanted to even him out. or di you want to bulid off of something passive and get some asset class that you need more help in.