Crucial Steps:
Portfolio Objectives: Establish the client's target risk/return profile over a three to five year time horizon, and identify any initial constraints.
Investment Guidelines: Decide the overall allocation of the portfolio to the major investment styles, and then select individual managers for each style segment of the portfolio, with a focus on diversifying strategies.
EIM's approach to portfolio construction:
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Basing allocation decisions, and monitoring of the portfolio's risk profile, on most recent information obtained directly from the underlying Hedge Funds.
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Creating a diversified mix of Hedge Funds, in order to reduce the probablility that a given set of market circumstances could negatively impact a broad portion of the portfolio.
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Using scenario-based stress-testing, employing exposures obtained from Hedge Fund managers.
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Paying attention to what Hedge Funds in the client's portfolio are actually doing in the markets.
In doing so, EIM strives to avoid overemphasizing statistical optimisation techniques (i.e. one of the keystones of the "Modern Portfolio Theory") which are so frequently used in traditional portfolio construction.
