Risk vs Trend Driven Global Tactical Asset Allocation

Posted: 19 Apr 2013  

Benoît Guilleminot

SMILE Investment Solutions

Jean-Jacques Ohana

Riskelia

Steve Ohana

ESCP Europe

Date Written: April 18, 2013

Abstract

The 2008 financial crisis has severely challenged passive forms of investment. In this paper, we compare two systematic investment processes that a global asset allocator may employ to preserve its capital in the face of a turbulent financial environment. The "risk-driven" allocation, derived from the popular "risk-parity" approach, has garnered a strong interest from both scholars and practitioners in the recent years. It aims at enforcing a constant risk target and maintaining a balanced risk profile over time. This paper introduces a novel "trend-driven" approach, which enhances the risk-driven strategy by cutting the exposure to downward drifting assets. We then compare the risk-adjusted performances of risk and trend driven approaches on different investment universes (composed of equity, commodity, currency and bond futures contracts) over the 1993-2012 period. We find that a trend-driven approach yields increased Sharpe ratios and lower drawdowns in average relative to a risk-driven strategy. However, the outperformance of the trend-driven process is not stable over time: periods with exploitable trends alternate with long-lasting trendless periods. Overall, the key advantage of the trending strategy over the risk-driven one is its higher smoothness. This is due to a better resilience to 2008-like financial meltdowns, which are well-predicted by trending signals and undermine the diversification objective pursued by the risk-parity approach. These results demonstrate the value of coupling risk and trajectorial signals in tactical asset allocation.

Suggested Citation

Guilleminot, Benoît and Ohana, Jean-Jacques and Ohana, Steve, Risk vs Trend Driven Global Tactical Asset Allocation (April 18, 2013). Available at SSRN: https://ssrn.com/abstract=2253335 or http://dx.doi.org/10.2139/ssrn.2253335

Benoît Guilleminot

SMILE Investment Solutions ( email )

91, Rue du Faubourg Saint Honoré
Paris, 75008
France

Jean-Jacques Ohana

Riskelia ( email )

5 avenue de Messine
Paris, 75008
France

Steve Ohana (Contact Author)

ESCP Europe ( email )

79 Avenue de la Republique
Paris, 75011
France

Paper statistics

Abstract Views
4,609