The Core-Satellite Model Revisited

Paper Summary:

In this article, the writer first defines core-satellite management and then discusses the efficency of the core-satellite portfolio model. The writer looks at the increase in exchange traded funds (ETFs) that are mainly used in the core of the portfolio. Furthermore, the writer notes that the list of alternative investments constantly increases, creating new possibilities for satellites. The writer maintains that thanks to the research, some models are improved and some others created that facilitate the use of the core-satellite management, for example, new methods are developed to measure hedge fund return. The paper includes color graphs and charts.

Outline:
Introduction
The Core-Satellite Model
Why the Core-Satellite Management?
The Tracking Error
Other Advantages/Drawbacks
Exchange Traded Funds (ETFs)
Overview of Exchange Traded Funds (ETFs)
What are ETFs?
What Kinds of ETFs Exist?
What are the Advantages of ETFs Versus Open-Ended Funds?
What are the Ways to Use ETFs?
Hedge Funds
Conclusion

From the Paper:

"The goal of the tracking error constraints is to limit the bad tracking error. However, tight tracking error constraints can lead to a suboptimal management of the portfolio.
"First, as most active managers still have dominant passive exposure to their benchmark, a great part of their fees reward a passively managed portfolio.
"Secondly, the active manager cannot use freely their skills. When an actively managed portfolio must follow a benchmark with tight tracking error constraints, it severely restricts the amount invested in active strategy. This means renouncing to opportunities of return enhancement and risk reduction. In case of economic downturn the opportunity cost is even higher because active absolute return strategies usually out-perform the market.
"With the core-satellite, on the contrary, because of the higher tracking error allowed to the satellites, the managers don't have to give up the potential of higher returns generated by selected active management strategies."

Sample of Sources Used:

• Amenc, N. and L. Martellini, "Portfolio Optimization and Hedge Funds Style Allocation Decision", 2002
• Amenc, N., Gehin, W., Giraud, J.-R., Martellini, L., Vaissie, M., "Edhec European Alternative Diversification Practices Survey", December 2005
• Amenc, N., Giraud, J.-R., Goltz, F., Le Sourd, V., Ma, X. and L. Martellini, "The Edhec European ETF Survey 2006", October 2006
• Amenc, N., Malaise, P. and L , Martellini, "Revisiting Core-Satellite Investing", Fall 2004
• CFA, Level I, Vol. IV, "Fixed Income, Derivatives, alternative Investments and Portfolio Management", Reading 75, Alternative Investments

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