GTAA account can often be carved out of existing cash assets in a portfolio. The actual size requirements vary depending on the degree of completion required, the amount of active risk desired, and the sensitivity of the client to making periodic contributions to the strategy. As a general rule of thumb, a pure overlay portfolio requires a minimum of 3 percent capital for every 1 percent active risk, and the completion portfolio requires about 1 percent. In a GTAA overlay portfolio, the capital is used as initial margin and as a cushion for investment performance. The GTAA active risk budget also varies across client portfolios. Since GTAA is uncorrelated with other active risks,16 a risk budgeting exercise will generally place significant risk capital in the strategy. Of course, the assumed information ratio on the strategy also critically determines its size; it is common to set this equal to the average IR on other active management activities. In our experience, clients typically choose GTAA active risk on their overall portfolios between 0.25 percent (contributing about 2 percent of the total active risk) to 2.0 percent (contributing more than half of the total active risk), although the potential for GTAA active risk is virtually unlimited.17 The most common target is 1.0 percent on the overall portfolio, in which case GTAA consumes about one-quarter of the active risk budget and requires about 5 percent of the portfolio's assets. To clarify, this risk target represents volatility on the client's overall portfolio, not volatility relative to the value of the overlay account. Relative to the overlay account alone, the volatility in this example would amount to 20 percent per year. As this example demonstrates, GTAA is almost always the most efficient source of active risk in a portfolio. Should Global Currency Management Be Included in GTAA? Historically, many institutions have created separate currency and GTAA overlay portfolios. This separation is unnatural, since currency allocation is an integral element of GTAA. We also believe separating currencies from GTAA is suboptimal. First, the best currency managers are also often the best GTAA managers since the best quantitative approaches apply equally well to currencies. Second, separating the two mandates increases the size of the assets that must be devoted to the program since both the currency and GTAA overlay portfolios need a buffer for profits and losses, and the diversification benefit from combining the two overlay accounts results in a smaller total profit/loss buffer. Third, the total management fees will generally be lower in a GTAA mandate that includes currency management than in two separate mandates, one for currencies and one for GTAA without currencies. This is especially true if the two overlay accounts each earn performance fees, since the client may end up paying performance fees in years that the total excess returns are negative. Finally, there are potential efficiency gains from managing GTAA and currencies jointly, since a fully specified GTAA program can exploit correlations between currencies and hedged equity and fixed income markets. (See Jorion 1994, 2002.) 16We measure this in a later section of this chapter. 17The practical limit occurs when the clients place 100 percent of their assets in GTAA and the strategy is run at its maximum tracking error of approximately 40 percent.