Tactical Alpha: A Quantitative Case for Active Asset Allocation

Posted: 3 Jun 2015 Last revised: 15 Aug 2017

See all articles by Adam Butler

Adam Butler

ReSolve Asset Management

Andrew Butler

Macquarie Group - Darwin Funds

Mike Philbrick

ReSolve Asset Management

Rodrigo Gordillo

ReSolve Asset Management

Date Written: September 3, 2014

Abstract

Grinold linked investment alpha and Information Ratio to the breadth of independent active bets in an investment universe with his Fundamental Law of Active Management. Breadth is often misinterpreted as the number of eligible securities in a manager’s investment universe, but this ignores the impact of correlation. When correlation is considered, a small universe of uncorrelated assets may explain more than half the breadth of a large stock universe. Given low historical correlations between global asset classes in comparison with individual securities in a market, we make the case that investors may be well served by increasing allocations to Tactical Alpha strategies in pursuit of higher Information Ratios. This hypothesis is validated by a novel theoretical analysis, and bolstered by two empirical examples applied to a global asset class universe and U.S. stock portfolios.

Suggested Citation

Butler, Adam and Butler, Andrew and Philbrick, Mike and Gordillo, Rodrigo, Tactical Alpha: A Quantitative Case for Active Asset Allocation (September 3, 2014). Available at SSRN: https://ssrn.com/abstract=2613467 or http://dx.doi.org/10.2139/ssrn.2613467

Adam Butler (Contact Author)

ReSolve Asset Management ( email )

1 Adelaide St. East, Suite 2000
Toronto, Ontario M5C 2V9
Canada
4165725477 (Phone)

HOME PAGE: http://www.investresolve.com

Andrew Butler

Macquarie Group - Darwin Funds ( email )

Brookfield Place
181 Bay St., Suite 3200
Toronto, Ontario M4V1Z1
Canada

Mike Philbrick

ReSolve Asset Management ( email )

1 Adelaide St. East, Suite 2000
Toronto, Ontario M5C 2V9
Canada
4165725478 (Phone)

HOME PAGE: http://www.investresolve.com

Rodrigo Gordillo

ReSolve Asset Management ( email )

1 Adelaide Street East
Suite 2100
Toronto, Ontario M5C 2V9
Canada
416-864-3597 (Phone)

HOME PAGE: http://www.investresolve.com

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