Building Drawdown-Minimizing Fixed-Income Fund-of-Funds Portfolios

Summary

This study constructs fixed-income fund-of-funds portfolios from products managed by one fund company, considering a setting where the available fund universe is limited. It separates funds into low-, medium-, and high-risk pools based on fund categories, then uses differential evolution to select portfolio weights with the goal of minimizing maximum drawdown. The optimization is presented as a flexible alternative to approaches that rely on estimating a covariance matrix; conditional value at risk is also mentioned as a possible objective.

The reported backtest uses semiannual rebalancing from 2015 onward. The low-, medium-, and high-risk portfolios had annualized returns of 3.29%, 6.71%, and 9.41%, with maximum drawdowns of 0.16%, 4.86%, and 14.63%, respectively. Excluding the extreme conditions of 2015 and 2016, the medium- and high-risk portfolios’ maximum drawdowns were reported as 1.47% and 1.48%. These are historical results from a restricted, single-provider fund universe; the document suggests a broader market selection might improve returns but does not demonstrate that claim.

Key ideas

• The study uses differential evolution to optimize fund weights for minimum portfolio drawdown.
• The low-risk pool combines money market, short-duration bond, and primary bond funds.
• Medium- and high-risk pools add progressively riskier bond and mixed-asset fund categories.
• Portfolios are rebalanced semiannually in the reported backtest.
• The reported risk and return vary by risk pool, and excluding 2015–2016 materially changes drawdown figures.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.