Risk Management/Portfolio Construction<

Many firms use risk management tools as part of their process.  Very few have been building them for over 20 years and use them in such an integral way as Los Angeles Capital Management. In fact, the investment process begins with analyzing how investors are pricing risk factors.   Factor forecasts are generated weekly which in turn generate new alpha forecasts for over 6000 global equity securities.  The optimization process then identifies the buy and sell candidates that improve the portfolio’s expected information ratio consistent with established client guidelines.  Portfolio changes are a reflection of the most recent return and risk estimates generated by the Dynamic Alpha Model. 

Twice each month, the portfolios are rebalanced through a quadratic optimization process which combines each client’s objectives, risk tolerance, and cost budget with the updated return, risk, and correlation forecasts on a universe of stocks.  Security weights are determined through a risk penalty optimization process whereby the firm maximizes alpha subject to a penalty for tracking error.  Rather than maintain a constant risk budget, the firm dynamically manages risk based on the portfolio’s expected information ratio subject to a tracking error limit.  Typically sector bets are limited to 6% versus benchmark weights and residual (company specific ) risk is limited to 1% to 1.5% and thus the portfolios are well diversified.

All portfolios are managed on a team basis and ultimately final recommendations are approved by the investment committee which is chaired by Hal Reynolds, Chief Investment Officer.