Rev. Date May 26, 2021

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.

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:

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 unconstrained. You can choose to set constraints based on desired allocations and factor exposures as you prefer. The constraints are accessible within “Portfolio Lab” and within your Portfolio Policy under “Manage Data.”

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.

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.

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.

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.

Additionally, within “Portfolio Lab,” you have the option to add a set of new opportunities to optimization. This “bench” of investments you’ve selected will be considered for new allocations in an optimized portfolio should Venn believe any of them can help achieve your desired objective and constraints.

Portfolio Lab is a space that allows you to explore multiple simultaneous portfolios in the optimization process. While a single optimized solution is shown, alternate portfolios are also visible. You can analyze certain tradeoffs of each portfolio by clicking on them within the “Efficient Frontier.” Once you select an alternate portfolio, the page will refresh and you can see how it compares to your current portfolio. You can also evaluate a “bench” of new opportunities within the context of an optimized portfolio.

At any level of the portfolio, you can choose to set minimum and maximum constraints by $ or % as well as by factor exposure. The lock button allows you to lock the “minimum allocation” and “maximum allocation” for any investment or strategy to its current allocation.

Open the constraints by clicking on the inputs menu, accessible from the left hand side of the page or within the “Optimized Portfolio Overview” table. Once you’ve opened the inputs menu, change your organization’s constraints and re-optimize.

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:

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.