Why are some allocation methods in Fincanva only available for models and not for portfolios?

Modified on Mon, 14 Apr at 5:58 PM

Some allocation methods in Fincanva are only available for models and not for portfolios due to differences in functionality, technical constraints, and the nature of portfolio construction. While models apply allocation methods directly to assets, portfolios allocate capital across models, which introduces specific limitations—particularly around shorting and rebalancing rules.

Here’s a table that summarizes the availability of each allocation method in models and portfolios.

Allocation Method	Available in Models	Available in Portfolios
Beta Neutral	Yes	No
Equal Weights	Yes	Yes
Fixed Weights	Yes	Yes
Floating	Yes	No
Market Cap Weighted	Yes	No
Mimicking Portfolio	Yes	No
Minimum Correlation	Yes	No
Modern Portfolio Theory	Yes	Yes
Ranking Based	Yes	Yes
Risk Scaling	Yes	Yes
Risk Parity	Yes	Yes

Why Some Methods Are Model-Only

Shorting Limitation in Portfolios: Portfolios allocate capital across models, which represent entire investment strategies. Unlike individual assets, models cannot be shorted. Therefore, allocation methods that rely on negative weights (like Beta Neutral or Mimicking Portfolio) are not applicable at the portfolio level.
Positive Weights Constraint: Allocation methods such as Minimum Correlation and full MPT often result in some assets receiving negative weights to optimize diversification or return. This works in models where assets can be shorted but is incompatible with portfolios that must assign strictly positive weights to models.
Computational Constraints and Interpretation: Portfolio-level allocation is more abstract because it works at the strategy level. Methods like Mimicking Portfolio or Minimum Correlation, which require optimization across individual asset relationships, don’t conceptually translate well to a set of models, each with its own internal logic.
Risk Management Design: Many model-only methods are meant for granular asset control and tactical strategies. Portfolios, by contrast, are built for combining diverse strategies at a higher level, where simple allocation methods are often more effective and interpretable.

By tailoring certain allocation methods to models only, Fincanva ensures more accurate simulations, logical capital distribution, and compliance with operational constraints—providing both flexibility and reliability in building investment strategies.