Quantamental Investing Methodology & Process for Multi-asset Portfolios
Tactical-management involves buying or selling of assets (or reducing exposure to them) to take up their risks during specific periods. Timing markets requires defining events that indicate the beginning and end of good performance periods for an asset class. Such events can be defined using quantitative tools such as time-series and technical tools such as price patterns. However, there is a need for context in which the event is happening. This is done using fundamental reasoning. Complex rules around context, time-series, and patterns are best programmed and tracked by algorithms.
Some asset classes move complementary to each other at some times, but not always. This requires taking into account the market-cycle of each asset class seperately when creating a multi-asset portfolio. Dynamic-allocation of assets allows switching exposure between asset classes on the basis of tactical-management of individual near complementary assets rather than fixed proportions (strategic allocation). This not only reduces overall risk of the portfolio but also enhances the returns. Once again context is required when defining rules for switching.
Markets move in a cyclical fashion of of boom, doom and gloom. This cycles is made up of many smaller underlying cycles which when overlapped for composite cycles of value, growth, and sentiment. By understanding these cycles, they can be exploited to assume risk or stay away from it completely. Equity cycles are different for differetn market caps, but have a high coorelation to large caps. Gold typically moes counter-cyclical to equity but not always.
Each asset class (primary) has a complemantry asset class (alternate) which moves in the opposite ditection. For a long-only strategy identifying the alternate asset becomes paramount in order to gain from periods when the primary asset class is not performing. However, there are constraints of varying correlations, tax optimization and liquidity that need to be factored in when making pairs.
A barbell strategy assumes only extreme ends of risk in the right proportions in order get a weighted average (middling) risk. This is more favourable than taking up the middling risk in a single instrument because it skews the probability of getting good outcomes, while being able to preserve capital at the same time. A barbell can be strategic or tactical. Tactical barbells lower volatility even more and geenrate even better returns.