Determining an optimal multiplier in dynamic core-satellite strategies

D'hondt, Catherine [UCL] Petitjean, Mikael [UCL] Caliman, Thibaut [unknown]

This paper investigates the performance in controlling downside risk for several multipliers in dynamic core-satellite strategies. Using Monte Carlo simulations calibrated on monthly data over a then-year period and three different portfolios, the findings reveal that the dynamic IR/TE multiplier offers the best level of capital protection, since the specified floor is violated in less than 99% of the cases. Even though other multipliers might offer higher average excess returns, the IR/TE multiplier still captures a significant fraction of the satellite excess return. In addition, it delivers an almost constant average floor violation rate, which is valuable for practitioners who may not underperform a given benchmark beyond a certain percentage.