If you are not following Wes Gray and his writing you are missing out. He churns out more research on quant strategies, stock picking, and investment theory than just about anyone I know. He runs a few websites (in addition to being a professor) where you can find more information, and I highly recommend following the blogs (listed at end of email) of both as well as his Twitter feed.
Wes and Toby also have a book out January 1 – Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors .
In the two pieces below, Wes takes a look at applying risk parity weightings as well as a volatility filter to a simple tactical asset allocation model with impressive results.
Highly recommended reading! (Also here is a list of more TAA reads from the Butler Philbrick crew.)
From the volatility based paper:
- Diversification is an effective risk-management tool, but it does not do enough for the investor that is intensely afraid of large drawdowns. We propose volatility-based allocation as an additional tool.
- Volatility-Based Allocation (VBA) is a two-signal model that is simple-to-implement, robust, and historically generates a favorable risk/reward return profile. The first indicator in VBA is the volatility regime signal, which simply identifies “Risk-On” and “Risk-Off” market regimes. The second indicator in VBA is the long-term moving average signal, which invests when the current price is above the 12-month MA, and invests in the risk-free rate otherwise.
- Over the March 1, 1986 to August 31, 2012 period, VBA generates a CAGR of 9.76% and a maximum drawdown of 9.64% when applied to our 5 core assets classes: domestic equity, developed equity, emerging equity, real estate, and long-term government bonds.
- VBA dominates the stand-alone long-term moving average as a risk management platform.
- VBA also has a low correlation with other “standard” asset allocation frameworks (e.g., risk-parity, min-variance, momentum/trend-following, etc.)
Download the two PPTs here:
Volatility-Based Asset Allocation
A Horse Race Between TAA Models
Their new book:
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