Rev. Date November 3, 2020
This functionality is available for Venn Pro users only.

### What is optimization?

Optimization is a mathematical analysis that is commonly run by allocators to help with exercises such as position sizing and portfolio rebalancing. At a high-level, optimization seeks to find the combination of investments that best meets an allocator’s defined investment objective.

### How can Venn help with optimization analyses ?

Venn permits allocators to run time-consuming mathematical optimization analyses quickly and easily, using Venn’s simple and intuitive interface.  Using Venn’s optimizer, you can:

• Estimate investment or strategy allocations using the forecasts your organization set on Venn

• Easily modify your organization’s investment objective and allocation and factor constraints to instantly generate new optimization results

• Compare optimization results against your organization’s portfolios and benchmarks

### What are some of the basics of optimization?

The scope of the optimization is set to the portfolio you have specified. You can select: (1) “maximize returns” with a volatility less than x%; (2) “target returns” of y% with minimum volatility; or (3) “maximize Sharpe” with a return greater than z%. The volatility (or return) shown by default in the optimization modal is the forecasted volatility (or forecasted return) of the portfolio.

By default, all investments and strategies within the portfolio are permitted to range from zero to twice their current allocation. You can change these min and max allocations as you prefer.

When launching optimization from an investment tearsheet, if you choose not to select a strategy for an investment, the investment will be added to the root of the specified portfolio. If you choose not to select a maximum allocation for an investment, it will be given the maximum allocation corresponding to the level in the portfolio above it.

### What investments can be included in optimization?

You can include investments available for analysis on Venn in optimization, so long as they contain at least 1 year of returns.[1] Venn does not include any investments in an optimization analysis that were not explicitly added by you.

### Generally, how does Venn approach optimization?

Venn takes a factor-based approach to optimization. Using the Two Sigma Factor Lens, Venn decomposes investment return streams into a set of factor exposures and a residual. Venn then runs optimization computations using your organization’s specified objectives and constraints, considering the contribution to risk and return for each investment based on your forecasts.

### Why type of optimization does Venn use?

Venn uses a variant of a mean-variance optimization that utilizes a factor risk model. We believe a well-specified and appropriately constrained mean-variance optimization can generate intuitive results.

### What does the max button do?

The max button allows you to set the “max allocation” for any investment or strategy to once or twice its current allocation. The top-level max button toggles this constraint to all investments and strategies.

### What does the lock button do?

The lock button allows you to lock the “min allocation” and “max allocation” for any investment or strategy to its current allocation. The top-level lock button toggles this constraint to all investments and strategies.

### Why are the default factor exposure constraints set to positive and negative three?

Given the construction of the factors in the Two Sigma Factor Lens, we believe it is unlikely for any portfolios to exhibit exposures greater than a magnitude of three (without taking on leverage). Although we believe these constraints therefore should generally not limit optimization outcomes, users can adjust these settings.

### What can I do if the optimizer is unable to find a solution?

It is easy to overly constrain the optimizer such that it can’t find a solution. You can try loosening any of your constraints to see if that leads to possible results. Examples include:

• Increase the volatility cap (e.g. from 3.0% to 5.0%, etc.)

• Lower the target return (e.g. from 5.0% to 4.5%, etc.)

• Widen the factor constraints (e.g. from 0 - .20 on Equity to 0 - .30, etc.)

• Unlock investments or strategies or

• Increase the max allocation for investments or strategies

### How can I adjust optimization settings?

Press the constraints button in the allocator panel to change your organization’s constraints and re-optimize.

### Should I trade based on optimization results?

When your organization makes investment decisions, Venn’s optimization results may be used only as a resource supplementing your organization’s primary investment, tax, accounting, legal and other advisors and your organization’s due diligence.   Optimization does not take into account your organization’s overall or complete financial situation, level of financial sophistication, investment experience, investment mandate, financial goals, or investment profile.  Venn’s optimizer does not accept all relevant investment profile or other data, make all potential settings available or customizable, or otherwise provide all important or relevant analysis to an investment decision, nor does Venn or Two Sigma Investor Solutions inquire into or otherwise determine if any data input, settings selected or analyses run are actually appropriate for your organization.  No determination has been made regarding the suitability of any securities, other financial instruments, portfolios, allocations, strategies, objectives, constraints, etc. for any organization.

In addition, Venn does not account for any fees or expenses, such as transaction, financing, management or performance fees, associated with making portfolio changes or holding any investments, or for tax, accounting, legal, regulatory or other considerations. Please see Venn’s Subscriber Agreement and Two Sigma Investor Solution’s Form ADV (publicly available and available on Venn) for further information on limitations of Venn.

Please note, this feature is only available in certain jurisdictions.

[1] The minimum amount of data required depends on data frequency and type of analysis. For Optimization, if a user’s portfolio or investment has daily or monthly data, Venn requires 1 year at a minimum but will default to periods with more data up to 3 years. For quarterly data, Venn requires 3 years at a minimum (or 12 data points) but will default to periods with more data up to 9 years to run analysis. Portfolios or investments with quarterly data must be interpolated to perform Optimization.

This document highlights certain aspects of this feature. As an overview, it does not discuss all material facts or assumptions. Please see Important Disclosure and Disclaimer Information.