Abstract

http://ssrn.com/abstract=2126478
 
 

References (24)



 


 



The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation


Andrew Clare


City University London - Sir John Cass Business School

James Seaton


City University London - Sir John Cass Business School

Peter N. Smith


University of York - Department of Economics and Related Studies; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Steve Thomas


City University London - Sir John Cass Business School

February 3, 2014


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: 38

Keywords: Risk parity, trend following, momentum, global asset allocation, equities, bonds, real estate, commodities

JEL Classification: G10,11,12

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Date posted: August 8, 2012 ; Last revised: February 4, 2014

Suggested Citation

Clare, Andrew and Seaton, James and Smith, Peter N. and Thomas, Steve, The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation (February 3, 2014). Available at SSRN: http://ssrn.com/abstract=2126478 or http://dx.doi.org/10.2139/ssrn.2126478

Contact Information

Andrew D. Clare
City University London - Sir John Cass Business School ( email )
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
James Seaton
City University London - Sir John Cass Business School ( email )
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
Peter N. Smith
University of York - Department of Economics and Related Studies ( email )
Heslington
York 010 5DD
United Kingdom
+44 1904 433 765 (Phone)
+44 1904 433 759 (Fax)
Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )
ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia
Stephen H. Thomas (Contact Author)
City University London - Sir John Cass Business School ( email )
106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44 (0) 20 7040 5271 (Phone)
+44 (0) 20 7040 8881 (Fax)
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