Flexible Asset Allocation Assessment

/Flexible Asset Allocation Assessment

Flexible Asset Allocation Assessment

We mentioned an interesting piece by Keller and Putten (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2193735) .

Here was our original take: https://alphaarchitect.com/2013/01/03/flexible-asset-allocation/

The strategy seemed worth a second look so my team at Empiritrage (Empirical-Based Arbitrage) went batsh&$ crazy.

What does the strategy look like? Here ya go:

strat

How did our results stack up?

FAA_v03

Sweet strategy…but is it curve-fitting?


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About the Author:

Wes Gray
After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.
  • Kenneth

    Do you weigh the rank or momentum? Is average correlation across all assets or EW index? Looks great..

  • weigh the rank.
    average correl across all assets.
    The system is susceptible to curve-fitting, but it does look good.

  • Posting from a blog reader:

    As much as I like FAA, let me tell you about a few insights:

    1) CAGR is very sensitive to trading day of month traded (see graphic below).

    2) I found that the key to FAA is the management of the drawdown. Absolute momentum limits drawdown best in the 21 trading day (one month), 84 to 104 trading day (4-5 month) and 250 trading day (1 year) ranges.

    3) I have played around a lot and found that within the above robust drawdown ranges, the impact of relative momentum is there but not the most meaningful driver of returns (drawndown mgt is). In fact once drawdown is managed with absolute momentum, I can stretch out to 12 months relative momentum and use different variations for vol and corr and still be doing pretty well (CAGR of 10% with sub 18 drawdowns)

    4) The 84 day relative/84 day absolute momentum (4mo/4mo) is the peak performance and that is why the original study stands out…. Unfortunately I have to make the call that that performance is a curve fit.

    5) During bull markets phases, any combo of relative and absolute momentum seems to work well. The key to FAA again appears to be its ability to manage drawdowns.

    6) Off all the above concerns, the biggest issue I have is that FAA is very sensitive to the day of month traded

    a. if last trading day of month – typically 21st trading day is used, performance is optimal

    b. if first day of month is used, you lose 100+ basis points, and it gets worse from there, the trough is when you hit mid-month, your CAGR is down to 7%, or half the 14% at month-end.

    c. note that since very few months have 22, 23 and none have 24 trading days, performances progresses quickly to zero on those.

    All insights found using Amibroker & optimizer…

  • John

    Nice review Wesley. Very well done! Your additional comments below are also helpful. Can you post you AmiBroker code so I don’t have to start from scratch?

    John

  • Emil Mladek

    Very nice review
    Since I’m not programmer myself
    I would appreciate if you could please post Amibroker code
    Not sure if you are Portfolio123 member but if you are then please post code for Portfolio123 also
    Thank you

  • Emil Mladek

    Does anybody answer ?

  • Hi Emil,
    I asked the commenter to share their code but they are unwilling to do so. Sorry.

  • Grady

    I would like to duplicate your results on an Excel spreadsheet. Do you have simple sample input data and results I can use for this purpose?