Upside investments aim to capture the upside potential in investments while managing downside risks. This requires evaluating asymmetry in returns and incorporating downside risk metrics. Advanced portfolio techniques like downside risk parity can help construct portfolios with balanced downside contributions across assets. Setting appropriate return targets and leveraging advantages of scale are also key. Overall, upside investments depend on capabilities to model upside scenarios accurately.
Assess Asymmetry in Returns to Identify Upside Potential
The key to upside investments lies in assessing asymmetry in potential returns. Investments with higher upside volatility tend to command risk premiums as markets price assets based on downside risks. However, capturing upside requires modeling the higher scenarios accurately. This depends greatly on portfolio manager capabilities.
Incorporate Downside Risk Metrics in Analysis
Relying solely on volatility to measure portfolio risks has drawbacks. Advanced techniques like downside risk parity balance both upside and downside contributions more effectively. Setting appropriate return targets also helps assess upside versus downside deviations.
Leverage Scale Advantages in Large Investments
Large investments allow exploiting scale advantages to maximize upside capture. Fixed costs get amortized over larger asset bases. Higher capacity unlocks additional information flows and financing opportunities.
Employ Effective Risk Controls for Drawdown Protection
Avoiding large drawdowns is key to participating in upside moves sustainably. Dynamic position sizing, volatility targeting, and other advanced tactics help manage downside without capping upside potential.
Upside investments require balancing upside capture with downside protection. This involves multifaceted risk modeling capabilities and exploiting structural edges available to large managers. Skillful execution of such upside strategies can enhance risk-adjusted portfolio returns over long horizons.