Barra Open Optimizer

Barra Open Optimizer
Barra Open Optimizer is an optimization library designed to fit seamlessly into portfolio management
workflows and support improved investment decision making processes.
It utilizes multiple optimization engines from MSCI and 3rd parties to create index tracking portfolios, manage
asset allocation, implement tax-aware strategies, and other objectives of portfolio managers. The solver’s extensive
feature set, including constraint-aware roundlotting and risk parity portfolio construction, enable portfolio managers
with economically meaningful results.
Benefits
» Built for Portfolio Management — The Barra Open Optimizer
interface is designed specifically for portfolio managers and its
algorithms are tuned for portfolio management challenges.
It incorporates proprietary solvers developed by MSCI’s optimization
research team and solvers created by leading optimization experts.
» Flexible Integration — An intuitive programming API, available
in C++, Java™, C#, and COM, provides easy integration with most
libraries within statistical tools such as MATLAB™, R, and SAS™.
In addition, an XML and Protobuf interface allows flexible
creation and management of optimization data and parameters
regardless of programming language. Documentation and working
sample code are included to help accelerate integration time.
» Multiple solvers in a single engine — The Barra Open Optimizer
utilizes multiple optimization solvers from MSCI and 3rd parties and
delivers a single interface to our clients. Some portfolio management
problems and strategies require a specialized solver to deliver an
economically meaningful solution. We eliminate the need for our
clients to implement multiple solutions.
» Create Investable Optimal Portfolios — Barra Open Optimizer
moves beyond mean-variance optimization through support for
advanced mandates and alternative portfolio construction techniques.
Constraint-aware roundlotting ensures the portfolio rules are satisfied
while creating round lots and include threshold constraints. Other
features include risk parity portfolio construction (also known as
equal risk weighting) and transaction cost control through fixed
costs, thresholds, and maximums on the number of names.
» Transparency in Optimization — By providing constraint
shadow costs reports, solution introspection and frontier analysis,
Barra Open Optimizer provides users with more transparency and
intuition around optimization results.
» Industry Acceptance — The Barra Optimizer engine powers
Barra Aegis, BarraOne, and Barra Portfolio Manager, which are
used by a wide range of institutional investors, including the MSCI
Global Minimum Volatility Indexes.
Common Input Settings for Optimizer Engine
(e.g. Benchmarks, Turnover, Hedge, etc.)
CQP Solver
NLP Solver
SOCP Solver
Portfolio with 10 Assets
Portfolio with 100 Assets
Portfolio with 1000 Assets
2/
31
/3
0
Benchmark (MSCI World)
20
12
/1
11
/1
2
/3
1
20
2/
31
/1
2
20
10
2/
31
20
09
/1
/3
1
/1
2
20
08
/1
/2
9
2/
30
/1
2
20
07
20
06
2/
31
20
05
/1
Cumulative Return
Special
Settings for
SOCP Solver
20
04
/1
Special
Settings for
NLP Solver
2/
31
(e.g. for “Cardinality Constraints”)
20
03
/1
Algorithms for Features
Special
Settings for
CQP Solver
Limiting the Number of Assets in Optimized Passive Portfolios
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
This chart shows the cumulative return of the MSCI World from the end of 2013 through the end
of 2012, and 3 tracking portfolios. The tracking portfolios are generated monthly with the Barra
Optimizer to minimize risk relative to the MSCI World, using a long only portfolio and a limited
number of assets. The Barra Optimizer efficiently balances the objective to track the benchmark,
with the discrete limit on number of positions.
Key Features
» Modern portfolio construction controls
»Constraints on maximum and/or minimum number of assets,
trades, and more
» Risk parity portfolio construction
Long-Short Hedging Basket Creation
» Minimize small trades or positions with precise control on thresholds
»Constraints on leverage for longs, shorts, and turnover that
can be defined independently by side
» Set a maximum on the number of assets help at portfolio or
at group level
»Enforce trades to round lots either during or after optimization
»Penalizes the residual alpha in optimization to correct alpha
and risk factor misalignment
»Limit the number of trades/longs/shorts/buys/sells
»Apply fixed transaction costs per trade in addition to piecewiselinear and non-linear transaction costs, specific to each asset
»Limit on buy turnover or sell turnover
»Paring constraints on holding or transaction levels on long
or short side
»Lower bounds on long or short groups even when the problem
becomes non-convex
»Targets and constraints on risk
»Modeling of short costs
»Provides soft bounds and constraints on leverage, risk, roundlotting,
and other settings
Tax-Aware Optimization
»Create a more flexible constraint hierarchy with the ability to set
priority levels for factor constraints
»Tax lotting, with HIFO, LIFO, and FIFO trading rules
»Enhance long/short optimization with new leverage constraints,
roundlotting, additional paring constraints, and non-convex risk
constraints
»Form efficient frontiers over tracking error, turnover, transaction
costs, or other constraints
»Bounds on long-and short-term gross gains or losses for tax arbitrage
»Multiple options for handling wash sales
Asset Allocation
»Risk parity portfolio construction
»Utilizes an asset-by-asset covariance matrix
»Includes futures, ETFs, currencies, and other alternative assets
»Add multiple risk terms to the objective function
»Prioritize soft bounds and constraints to increase likelihood
of feasibility
»Control the optimality tolerance
»Optimize dual risk models and multiple benchmarks
»Maximize the information ratio and/or Sharpe ratio
»Fully parameterized mean-variance utility function
»Control the maximum time limit for an optimization that have
reached feasibility but not yet converged to optimality
Index Tracking
»Bounds on total or active risk at portfolio or sub-group level
»Maximum limit on piecewise-linear transaction costs
Barra Open Optimizer can form portfolios under complex considerations. Here is a visualization of a
potential optimization problem with risk aversion, maximum on the number of names, asset and factor
constraints, and the requirement to trade round lots. The peaks represent local solutions, and the green
lines demarcate the feasible region. Diamonds represent portfolios formed out of round lots.
Technical Highlights
»APIs are available in C#, C++, Java™, and COM (allowing
integration with Microsoft .Net and Excel® platforms)
»Package is available for 64-bit machines running Microsoft Windows®
and Linux® environments
»Library can be incorporated into statistical packages of MATLAB™,
SAS™, and R with examples included
»Complete package includes programmers’ references, tutorials,
and working sample code for all supported development languages
»XML and Protobuf interface for problem creation or maintenance
»Barra Open Optimizer has minimal baseline system requirements
msci.com | [email protected]
About MSCI
MSCI Inc. is a leading provider of investment decision support tools to investors globally, including asset managers, banks, hedge funds and pension funds. MSCI products and services
include indexes, portfolio risk and performance analytics, and ESG data and research.
The company’s flagship product offerings are: the MSCI indexes with over USD 9 trillion estimated to be benchmarked to them on a worldwide basis1; Barra multi-asset class factor
models, portfolio risk and performance analytics; RiskMetrics multi-asset class market and credit risk analytics; IPD real estate information, indexes and analytics; MSCI ESG (environmental,
social and governance) Research screening, analysis and ratings; and FEA valuation models and risk management software for the energy and commodities markets. MSCI is headquartered
in New York, with research and commercial offices around the world.
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1
As of March 31, 2014, as reported on June 25, 2014, by eVestment, Lipper and Bloomberg
September 2014
©2014 MSCI Inc. All rights reserved.

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