Recent asset allocation articles (tactical or otherwise) that you might have missed:
Market Timing the Credit Cycle (EconomPic)
Jake looks at forward returns based on the width and direction of the credit “quality spread” (high yield minus investment grade OAS). Below we’ve reproduce Jake’s results and added an equity curve showing SPY returns in the month following bullish conditions in orange (where we find ourselves now), versus bearish conditions in grey.
As Jake alludes to, there is limited data to consider and confidence is limited in how well these results hold moving forward. This observation probably isn’t strong enough alone to build a strategy around, but may have value as a confirming signal. What we can say is that these results dispel the notion that tightening of the quality spread is an indicator of irrational exuberance in the near-term.
Portfolio Optimization: Simple vs Optimal Methods (ReSolve Asset Mgmt)
A masterwork from ReSolve (beware: herein lies hardcore geek stuff). This is a defense of portfolio optimization techniques (i.e. min var, risk parity, etc.) over simple 1/n weighting. It really boils down to using the right optimization method for the unique characteristics of the universe traded. The 12 asset class portfolio (with its high “quality ratio”, making it primed for portfolio optimization), coupled with max diversification (the universe’s optimal optimization method) looks very promising.
Volatility, Dispersion & Correlation – Friends or Foes? (Factor Research)
Nicolas takes an interesting look at the relationship between volatility, dispersion and correlation, and the probability of large drawdowns in the US stock market. Possibly some opportunities here for using these results in a risk management overlay for a TAA strategy.
The Misleading Lessons of History (Newfound Research)
Corey starts with the question: “can we create an asset allocation that has never lost money over any n-month period?” He first intentionally answers that question the wrong way (brute force overfitting) and comes up with a nonsensical allocation that doesn’t pass the smell test. He then answers it in a smart way (subset resampling) that results in a much more practical asset allocation.
Principal Component Momentum? (QuantStrat TradeR)
Ilya takes a crack at a strategy from David Varadi that we mentioned in our previous roundup. The strategy uses Principal Component Analysis (PCA) to drive a tactical asset allocation strategy. Our first pass at the strategy showed similar results when using a rolling lookback, but David mentions “next steps” in his original post that we think might bear fruit. We like the concept behind this strategy, and will continue to monitor David’s work, and hopefully be able to add it to the site in the near future.
Other recent links that you might have missed:
- When Diversification Fails (Alpha Architect)
- What’s in Your Benchmark? A Factor Analysis of Major Market Indexes (Alpha Architect)
- A Trend Equity Primer (Newfound Research)
- Decomposing Trend Equity (Newfound Research)
- Portfolio Optimization and the Sharpe Multiplier: A Case Study on Managed Futures (ReSolve Asset Mgmt)
Recent goodness from Allocate Smartly:
- FX Risk, International ETFs and Asset Allocation
- Accelerating Dual Momentum
- Tactical Asset Allocation in September
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