Estimating Fund Weights with Constrained Returns-Based Style Analysis

Summary

The discussion asks whether a fund’s average allocations to two equities can be inferred from the fund’s cumulative performance and the equities’ performance, given the assumption that the fund only holds those securities. The substantive answer recommends Sharpe’s returns-based style analysis: regress fund returns on the returns of the underlying equities while constraining the estimated weights to represent portfolio proportions.

The resulting weights describe an average exposure over the sample, not necessarily the fund’s holdings at any particular time. The answer cautions that high turnover can make the estimate inaccurate, and the strong correlation between the two equities makes their individual contributions difficult to distinguish. Another response suggests an equal split when there is no further information about the fund’s allocation choices, but this is a guess based on symmetry rather than an estimate from the return series. No data or fitted regression results are provided, so the method’s accuracy for this case is not demonstrated.

Key ideas

• Constrained returns-based style analysis can estimate average fund exposure to underlying assets.
• Regressing fund returns on asset returns provides estimated weights under portfolio constraints.
• Estimated weights summarize the sample period and may conceal changes in allocation over time.
• High turnover and highly correlated assets can make individual weights unreliable.
• An equal allocation is only a guess when no additional allocation information is available.

Tags

# Calculating the allocation of a fund given two correlated variables


# Calculating the allocation of a fund given two correlated variables












Imagine this hypothetical situation: I have a time series of cumulative performance of a fund and two time series of equities that are highly correlated to them. I know that that this fund ONLY applies money in those two equities, since his conception.

Is there a way to compute the average allocation(in %) of this fund in those two equities given only those informations? Any hints or advices are more then welcomefu

## Answer by Tim Wilding (score 3)

https://quant.stackexchange.com/a/55546

A good method for getting the proportions would be to use Sharpe's returns-based style analysis. Style Analysis is a constrained regression. Regress the returns of the fund against the two underlying equities and you can see weights in the individual equities. This method would come with a lot of caveats though - the weights returned would be an average over time. If there is a high turnover in the fund, then it is not likely to be very accurate.

## Answer by develarist (score 1)

https://quant.stackexchange.com/a/55513

Without any further information about how the fund makes allocation decisions, and if it only invests in those two securities, which are highly correlated, meaning that there is not much else reason to select one over the other, then the average allocation the fund is likely making is 50% towards each asset.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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