Assignment: Investment Policy Statement Assignment
Write an investment policy statement ("IPS") for an investment strategy of your choice. The policy should be two pages, maximum. Take the time to think through how you would start executing the strategy on day one, and how you will manage the strategy from day to day. The sample IPS format can be used as a reference but changes may be needed for your IPS depending on the strategy you select.
Context/Purpose:
Most people think investment research is entirely about finding profitable trading signals. While that is a key point, a practitioner must understand how to translate an investment idea into a viable product, whether it be a mutual fund, separately managed account, hedge fund, ETF, etc.
The IPS can serve many important roles, including:
• Communication guide: how you talk to clients about the strategy, consistency check for marketing materials
• Behavioral guide: Plan for how to manage the strategy in multiple scenarios, especially drawdowns
• Compliance: set out your constraints in terms of markets, instruments, weights, diversification, etc.
• Operations: consistency check and guideline for daily operations
• And plenty more - not bad for a one-two page document!
Investment Policy Statement XYZ EQUITY STRATEGY FUND
I. Purpose: This Policy will summarize the investment objectives of XYZ EQUITY STRATEGY FUND ("the Fund") and the procedures and processes for managing the Fund. This Policy will be reviewed periodically by the PM of ABC ASSET MANAGEMENT ("ABC").
II. Fund Objective: The Fund seeks to generate positive long term returns by investing in a concentrated portfolio of U.S. equities (the "Equity Portfolio"). The Fund will seek to maintain a high positive correlation to the S&P 500 index over longer time horizons and to keep annualized volatility between 15 and 30%, while recognizing that this range may not always be achieved.
III. Roles, Responsibilities and Procedures: The PM of ABC selects equities, determines their initial allocation levels, and manages the Fund allocations and total exposure on an ongoing basis.
IV. Investment Philosophy: The PM will make investment decisions that seek concentrated exposure to U.S. equities while seeking to manage volatility and drawdown. The PM believes that long term growth can be achieved by selecting a concentrated portfolio of stocks selected using a "dual momentum" approach. By adhering to a strict sell discipline short term volatility and losses may be mitigated without necessarily sacrificing long-term expected return. Additionally, sector diversification may help to mitigate drawdowns to the extent that equities from multiple sectors meet the PM's criteria for investment.
The PM will therefore strive to select stocks that:
1. Have excellent standalone characteristics and
2. Have high potential portfolio diversification.
V. Investment Selection and Portfolio Management:
Equity Selection. The PM will select stocks that he believes to be viable options for pursuing the Fund Objective based on their Dual Momentum Rank.
"Dual Momentum Rank": The PM has developed a proprietary dual momentum ranking method that compares each stock in the Universe based on cross-sectional momentum, time series momentum and risk. Stocks with high medium-term momentum and low risk receive high ranks, while stocks with low momentum and high risk receive low ranks. Stocks with negative medium-term time series momentum are not eligible for investment.
The PM will review existing and potential investments continually in order to maintain a concentrated portfolio of the strongest possible stocks.
Portfolio Construction and Exposure Management. The PM will attempt to allocate approximately equal risk to each stock in the portfolio. Risk is evaluated on a discretionary basis using both quantitative and qualitative inputs. Such inputs include the historical volatility of each stock and correlation with other stocks in the portfolio. At certain times such as bear markets, the PM may see few or no opportunities and take a defensive posture in the portfolio. During these circumstances the PM will have most of the assets of the Fund in cash and T-Bills. In extreme circumstances the PM may go entirely to cash for periods of time.
Investment Constraints. The Fund will generally not make an allocation above 50% or below 5% to any single stock. The Fund is long-only and will not use leverage or sell stocks short.
Investment Universe. Stocks in the Russell 3000 Index are the only stocks eligible for investment.
VI. Additional Guidelines: The PM may invest in the Fund after obtaining pre-trade approval from the Chief Compliance Officer of ABC.
VII. Review and Revision of the IPS: The PM will review and revise this Investment Policy Statement as needed.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also include a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also Include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.