You want to hedge a stock portfolio with a very liquid option contract. However, your fund has a high tracking error relative to the underlying option index. You can divide your portfolio to reduce your basis risk.
In portfolio management, the combination of SAA and TAA portfolios is key to build robust funds.
The SAA reflects the long term view of the management team on the different assets, while the TAA allows to implement short-term views and adds a tilt to SAA, hopefully adding some alpha to the fund.
In this article we look into the incorporation of TAA and its sizing along an existing SAA portfolio.