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The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset AllocationSteve ThomasCity University London - Sir John Cass Business School Andrew ClareCity University London - Sir John Cass Business School Peter N. SmithUniversity of York (UK) - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) James SeatonCity University London - Sir John Cass Business School August 15, 2012 Abstract: We examine the effectiveness of applying a trend following methodology to global asset allocation between equities, bonds, commodities and real estate.The application of trend following offers a substantial improvement in risk-adjusted performance compared to traditional buy-and-hold portfolios. We also find it to be a superior method of asset allocation than risk parity. Momentum and trend following have often been used interchangeably although the former is a relative concept and the latter absolute. By combining the two we find that one can achieve the higher return levels associated with momentum portfolios but with much reduced volatility and drawdowns due to trend following. We observe that a flexible asset allocation strategy that allocates capital to the best performing instruments irrespective of asset class enhances this further.
Number of Pages in PDF File: 32 Keywords: Risk parity, trend following, momentum, global asset allocation, equities, bonds, real estate, commodities JEL Classification: G10,11,12 working papers seriesDate posted: August 8, 2012 ; Last revised: September 18, 2012Suggested CitationContact Information
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