An endowment Chief Investment Officer is considering investment ($100 million) with an active global equity manager....

  

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An endowment Chief Investment Officer is considering investment ($100 million) with an active global equity manager. One candidate manager is a fundament driven stock picker (very similar to the China Fund manager that we have talked about in the class). The fundamental manager runs a strategy that has an alpha target of 5% and a track error target of 10%. The other candidate manager is a quantitatively driven active equity manager (very similar to GSAM case as we have discussed in the class). The quantitative manager has an alpha target of 2.5% and a tracking error target of 3.5%. The two managers' alpha streams historically have a correlation of 0.1. How would you recommend the endowment CIO to structure her active global equity allocation ($100 million)? Specifically, should she hire one manager vs. another? Should she split her allocation between the two managers? If so, what's the split? Please provide detailed rationale for your recommendation. o An endowment Chief Investment Officer is considering investment ($100 million) with an active global equity manager. One candidate manager is a fundament driven stock picker (very similar to the China Fund manager that we have talked about in the class). The fundamental manager runs a strategy that has an alpha target of 5% and a track error target of 10%. The other candidate manager is a quantitatively driven active equity manager (very similar to GSAM case as we have discussed in the class). The quantitative manager has an alpha target of 2.5% and a tracking error target of 3.5%. The two managers' alpha streams historically have a correlation of 0.1. How would you recommend the endowment CIO to structure her active global equity allocation ($100 million)? Specifically, should she hire one manager vs. another? Should she split her allocation between the two managers? If so, what's the split? Please provide detailed rationale for your recommendation. o

Answer rating: 100% (QA)

SOLUTION To recommend the optimal structure for the endowment CIOs active global equity allocation we need to consider the characteristics and performance targets of the two candidate managers as well ... View the full answer