Mathematics of Post Trade Allocation

Since the financial crisis, more investors choose a separately managed account (SMA) instead of a co-mingled fund for their investments. The objective of the investor in choosing an SMA is to maintain the legal control of... [ view full abstract ]

Since the financial crisis, more investors choose a separately managed account (SMA) instead of a co-mingled fund for their investments. The objective of the investor in choosing an SMA is to maintain the legal control of their investment vehicle while tracking the performance of the underlying Fund. However, there is no simple solution for post-trade allocation between the Fund and the SMAs that results in a uniform distribution of returns. This paper is the first systematic treatment of post-trade-allocation risk. We present a solution that convergence to uniform allocation of return with increasing number of trades.