Perpetual Tracker with Risk Target

Perpetual Tracker with Risk Target ("Perpetual+") is an investment process with the following objectives:

• Manage the portfolio with a fixed risk target (risk target being defined as the realised volatility)
• Ensure a certain percentage of the highest reached portfolio value is protected on a perpetual basis

The process is a version of the Time-Invariant Portfolio Insurance ("TIPI") technique and defines the Multiplier (a measure of riskiness of the portfolio) as a function of the realised volatility of the portfolio, reflecting the view that the riskiness of an underlying is not constant.

I have been running a process since 19 May 09 on Hang Seng China Enterprises Index ("HSCEI"). The process switches between the index and the overnight money market depending on

• The distance between the portfolio and the targeted protection
• The 30-day realised volatility of the index

Below are the specification of the process:

• Protection ("BF"): 70% of the highest reached portfolio value ("RPV")
• Multipler: Min(8, 8 x Vol Target / 30-day Realised Volatility)
• Vol Target: 15%
• Rebalance Tolerance: +/-10%
• Maximum exposure to HSCEI: 240%
• Minimum exposure to HSCEI: 0%
• Initial portfolio value: $500,000