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Post-modern Approaches for Portfolio Optimization

In: Handbook on Information Technology in Finance

Author

Listed:
  • Borjana Racheva-Iotova

    (Fin Analytica Inc.)

  • Stoyan Stoyanov

    (Fin Analytica Inc.)

Abstract

The search for alpha is the major challenge for both traditional equity managers and hedge funds. The assets under management only in hedge fund industry rose from about $500 billion to over 1 trillion for the period 2001−2005 and are expected to grow to 2.5 trillion over the next 4 years; the number of hedge funds approaches ten thousands. This highly competitive environment challenges discoveries of scalable strategies that can effectively attract and utilize new investments. Besides, the market itself calls for increased sophistication demonstrating pronounced asymmetry in financial returns, heavy-tails and other phenomena. It is clear that in this new environment the traditional portfolio optimization methods based on the minimization of the standard deviation or tracking error can no longer present a viable portfolio construction mechanism and portfolio managers are forced to shift from what is now known as modern portfolio management and revise some key concepts in their practices.

Suggested Citation

  • Borjana Racheva-Iotova & Stoyan Stoyanov, 2008. "Post-modern Approaches for Portfolio Optimization," International Handbooks on Information Systems, in: Detlef Seese & Christof Weinhardt & Frank Schlottmann (ed.), Handbook on Information Technology in Finance, chapter 25, pages 613-634, Springer.
    • Handle: RePEc:spr:ihichp:978-3-540-49487-4_25
    DOI: 10.1007/978-3-540-49487-4_25
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