Global Tactical Asset Allocation Strategies

Tactical asset allocation is commonly defined as a dynamic investment strategy that actively adjusts and rebalances the asset allocation of one’s portfolio in order to improve its performance while limiting risk compared to strategic asset allocation which is a passive way of investing.

Top4There are two broad ways to implement tactical asset allocation strategies: a discretionary approach and a model-based approach. We focus here on the latter, also called systematic approach, which is the one we use here at My ETF Hedge Fund. These strategies use quantitative models to systematically exploit so-called market anomalies or inefficiencies among or within different asset classes. Instead of a long-only buy-and-hold traditional strategies, tactical asset allocation implies shifting in and out of assets according to evolving market conditions. There are various ways to do so. For example, several strategies aim at taking advantage of momentum, which has been identified as a significant market anomality by extensive academic research. Quantitative relative strength or trend following strategies are among them.

Model Conservative Retirement Aggressive Platinum Benchmark
Access Free Premium Premium Premium N/A
CAGR +12.3% +13.3% +24.3% +24.2% +6.2%
Volatility 8.4% 6.8% 16.6% 12.0% 7.9%
Ulcer Index 7.75% 3.66% 31.56% 14.95% 101.11%
Drawdown -5.5% -4.1% -11.0% -7.5% -23.12%
Sharpe Ratio 1.07 1.48 1.21 1.64 0.40
Sortino Ratio 0.87 1.23 0.89 1.46 0.30
Worst 12-month -3.12% +3.93% -8.26% -6.80% -21.11%
Worst 6-month -4.28% -0.22% -6.73% -3.67% -20.34%
Worst month -4.13% -4.10% -7.42% -4.10% -8.69%
Positive months 66.7% 72.6% 67.9% 67.9% 66.7%

 

Several recent study have pointed to a potential dimishing momentum effect within stocks. Here comes global tactical asset allocation strategies, which seek to capitalize on momentum across asset classes. The idea here is to invest in (or overweight) the best performing asset classes around the world. In order to do so efficiently, one needs to rely on a broad universe encompassing equity markets around the globe, bonds of different duration, different quality (investment grade, junk bonds), issued by different entities (governments, municipalities, corporate), currencies, commodities (oil, grains, base metals, precious metals) and Real Estate Investment Trusts, both on the short and the long side.

Our platinum portfolio is a turnkey fully comprehensive global tactical asset allocation strategy that mostly relies on momentum to allocate funds to best performing asset classes in a way that aims to achieve strong absolute returns and actively manage risk in order to keep volatiliy and drawdowns as low as possible. By relying on several sub-universe for ranking the risk-adjusted performance of asset classes, one can better control the overall asset allocation, correlation between holdings and overall risk level. Global tactical asset allocation strategies like these can well be implemented alone, or be used as a way to boost the performance of a portfolio also comprised of long term holdings. This mix between core holding and tactical positions is often reffered to as a “core-satellite” strategy. More on the 2011 performance.

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