Hedge Fund Risk Fundamentals: Solving the Risk Management and Transparency Challenge

CHAPTER 14

Constructing a Portfolio of Funds

There is a debate within investment organizations as to whether portfolio construction is an art or a science. Let's explore this through the analogy of the golden ratio. The classical Greek mathematicians Euclid and Pythagoras are credited with discovering the golden ratio. Artists throughout the ages (especially the Greeks and Renaissance artists) believed the golden rectangle, based on the golden ratio, to be the most visually appealing shape and have used it in many of the great pieces of art. For example, during the Renaissance, Leonardo da Vinci made wide use of the shape. The artistic application of mathematical theory enabled these great works of art to be created. The same is true in the construction ...