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

34 Pages Posted: 8 Jun 2013

See all articles by Andrew Clare

Andrew Clare

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

Multiple version iconThere are 3 versions of this paper

Date Written: May 1, 2013

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.

Keywords: risk parity, trend following, momentum, global asset allocation, equities, bonds,

JEL Classification: G10, 11, 12

Suggested Citation

Clare, Andrew D. and Smith, Peter N. and Thomas, Stephen H., The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2275745 or http://dx.doi.org/10.2139/ssrn.2275745

Andrew D. Clare (Contact Author)

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

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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