The Influence of Macroeconomic and Behavioral Factors on Tactical Strategy Allocation (TSA) for Funds of Hedge Funds

The majority of research on sustainable withdrawal strategies has used either historical rolling time periods or a stochastic (Monte Carlo) simulation process based on long-term averages, where the expected return of an asset class is the same for each year of the simulation. While these approaches...

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Bibliographic Details
Published in:The journal of wealth management 2013-10, Vol.16 (2), p.63
Main Authors: Anand, Gaurav, Kutsarov, Iliya, Maier, Thomas, Storr, Marcus
Format: Article
Language:English
Subjects:
Arbitrage
Behavior
Bias
Economic crisis
Equity
Hedge funds
Industrial production
Influence
Investigations
Macroeconomics
Monte Carlo simulation
Regression analysis
Studies
Volatility
Withdrawals
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Summary:The majority of research on sustainable withdrawal strategies has used either historical rolling time periods or a stochastic (Monte Carlo) simulation process based on long-term averages, where the expected return of an asset class is the same for each year of the simulation. While these approaches may be reasonable to describe long-term averages, we believe they are less useful when there is a significant and sustained deviation, such as the current low bond yield market. This article introduces a model that takes into account current bond yields and allows them to "drift" toward a higher value during retirement, using an autoregressive model based primarily on historical relationships between asset classes. This approach can better replicate the actual bond returns a current or near retiree can expect during retirement both now and in the future. Using this model, we find a significant reduction in "safe" initial withdrawal rates, with a 4% initial real withdrawal rate having approximately a 50% probability of success over a 30-year period. It finds that a retiree who wants a 90% probability of achieving a retirement income goal with a 30-year time horizon and a 40% equity portfolio would only have an initial withdrawal rate of 2.8%. Such a low withdrawal rate would require 42.9% more savings if the retiree wanted to pull the same dollar value out of the portfolio annually as he or she would get with a 4% withdrawal rate from a smaller portfolio. [PUBLICATION ABSTRACT]
ISSN:1534-7524
2374-1368
DOI:10.3905/jwm.2013.16.2.063