Tactical asset allocation

Tactical asset allocation is about investment in the short-to-medium term. It typically describes active position-taking around a given benchmark or a benchmark-free long/short approach of the kind frequently adopted by macro hedge funds. Our clients for these products include both long-only investment institutions and hedge funds.

The tools for short-term (12-18 months) tactical asset allocation differ substantially from those used for strategic asset allocation. As the emphasis for tactical asset allocation is naturally on short-horizon predictability, we have developed a variety of short-term indicators that help predict asset returns over shorter time horizons.

These indicators can typically be classified as ‘fundamental’, ‘momentum’, ‘value’ or ‘growth’, as follows:

• Fundamental indicators will include high-frequency economic data or asset prices with leading indicator properties. 

• Momentum indicators will summarise recent price or earnings behaviour, to the extent that these have predictive qualities.

• Value indicators assess the relative cheapness of different assets according to a variety of metrics. 

• Growth indicators, especially applied to equities, will summarise the behaviour of earnings potential and market forecasts thereof.

We use these indicators to inform short-term asset allocation in a number of ways:

• We estimate econometric relationships that summarise the information in the indicators for short-term asset returns. For an example of such a model, please click here.

• We run a proprietary tactical asset allocation model, built in Excel that allows the user to relate short-term asset returns to the momentum in any economic lead indicator of their choice, or any of the indicators listed above. 

• We have a number of econometrically-estimated ‘Libor+’ models, which look for pairs or triples of assets that ‘cointegrate’ with a Libor + x% benchmark. This is essentially a value screen designed for absolute return investors that allows investors to pick out interesting trades from large universes of equity sectors, fixed income yields or currencies.

• We also specialise in building client-specific tactical asset allocation Chartbooks, which consist of a set of live-feed charts of the indicators listed above that update daily.