Asset allocation constraints
Contents
Optimisation decides how much to allocate to each selected asset. Constraints are the limits it must respect while doing so. They are set separately for the Performance and Hedge portfolios.
The Per Asset Allocation constraint bounds the share any one asset can take of the portfolio it sits in—the Performance or the Hedge Portfolio. A range of 0% to 50% means each asset is held long, at up to half of that portfolio. A range like -30% to 50% allows shorting up to 30% as well as holding long up to 50%—negative weights apply only when Direction is set to Long & Short. The bounds must be solvable: two assets each capped below 50% cannot fill a portfolio.
When the Hedge Portfolio is on, the split between the two parts of the overall portfolio is itself a constraint. Performance Portfolio Allocation, set in the Performance Portfolio's constraints section, bounds the share of the overall portfolio allocated to the Performance Portfolio—a range of 50% to 80% leaves 20% to 50% for the Hedge Portfolio. The optimiser sets the exact split within these bounds at each rebalance—see Performance and Hedge portfolios.
Cash can be held as an asset, with zero volatility and zero return. It is off by default, and the recommendation is to leave it off. When on, a separate cash constraint bounds the share held in cash; a maximum of 20% is a sensible ceiling.
Constraints interact with the optimisation method. The Markowitz methods apply them directly. Equal Weight and Hierarchical Risk Parity allocate by their own logic: the per-asset bounds do not apply to them, and when Cash is on it is held at the minimum of the Cash Allocation range rather than optimised within it.
| Constraint | Markowitz methods | Equal Weight | Hierarchical Risk Parity |
|---|---|---|---|
| Per Asset Allocation | applied directly | does not apply | does not apply |
| Cash Allocation | optimised within the range | held at the range minimum | held at the range minimum |
