Multi-horizon portfolio insurance model

Abstract

This paper presents and analyses the structure of a new mutual fund management model that allocates a fund’s resources with respect to the different time preferences of investors. The proposed model enables the explicit definition of investment horizons in a regular open-ended fund framework that uses the popular portfolio insur-ance strategy based on value at risk. Investors are assumed to be homogeneous in terms of their risk/reward preferences but heterogeneous in terms of their investment horizons. Time moments when investment decisions are made by individual investors are spread out over time randomly because of the different life cycles of investors. We assume that all investors in the fund can be separated into manageable numbers of groups regarding their remaining investment horizons. The fundamental concept of the proposed multi-horizon portfolio insurance model is optimising the composition of the fund according to the most conservative allocation among the optimal portfo-lios of all considered groups of investors. A historical simulation based on US financial data is also used to compare the proposed model with the regular single horizon strategy and to stress test proposed model with its various parameterisations.