Howard-D'Antonio Strategy

DEFINITION of 'Howard-D'Antonio Strategy'

An algorithm designed to maximize the expected return of a portfolio. The Howard-D'Antonio Strategy provides a hedge ratio and measures the hedging effectiveness of a given portfolio by explicitly taking into account both the hedger's risk and his/her return. In this way, an investor hopes to get the maximum return for the minimum amount of risk.

BREAKING DOWN 'Howard-D'Antonio Strategy'

The Howard-D'Antonio Strategy recognizes that the classic one-to-one hedge strategy doesn't make sense in all instances. This is because it uses a hedge coefficient of 1, whether past or expected correlations with spot prices and/or futures prices warrant it or not. The Howard-D'Antonio Strategy remedies this situation by assuming one has a choice between three investments: a spot position, a futures contract or a risk-free asset. The Strategy then looks at the risk-return characteristics of all three to derive the best, most profitable mix.